Economics of the Stakeholders' Firm

We model workers and shareholders contracting for joint production when investment in knowledge is non-verifiable and resulting transaction specific human capital, embedded in the workers, is non tradable. The model provides sufficient conditions for workers' becoming stakeholders of the firm and allows us to investigate the enlightened self-interest of shareholders to empower workers as a way to motivate investment. The model is extended to account for external product market competition that forces to share wealth with customers, and to consider the welfare loss from risk sharing with risk averse workers. Problems of implementation of bilateral and trilateral governance mechanisms for the "new" firm, that substitute the hierarchical shareholders oriented mechanism of the old one, are highlighted.