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Theoretical Economics Paper
Ownership and Managerial Competition: Employee, Customer, or Outside Ownership
Patrick Bolton and Chenggang Xu
March 2001
Paper No' TE/2001/412:
Full Paper (pdf)

Tags: ownership; competition; incomplte contracts; human capital

This paper centres around the question of ownership of firms and managerial competition and how these affect manager and employees' incentives to invest in human capital. We argue that employee's incentives in human capital investment are affected by both ownership and competition since both ownership structure and competition provide bargaining chips to employees. Ownership provides protections which may improve or dull employees' incentives for human capital investment. When there is fierce market competition and no lock-in the allocation of ownership does not play a role (as one might expect), provided that human and physical assets are sufficiently complementary. If asset complementarity is low, ownership matters even in the absence of lock-in. In general, the most efficient ownership arrangement is that which maximizes managerial competition inside the firm.