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Why Information Technology Workers Own Their Firms: How the Relative Importance of Human Capital Affects Firm Ownership
ICIS 2003 Proceedings
  • Shinkyu Yang, Massachusetts Institute of Technology
  • Heekyung Kim, Jet Propulsion Laboratory
  • Yannis Bakos, New York University
Publication Date

Knowledge workers are critical for the production of goods and services in the information economy, and thus investment in human capital plays an increasingly important role in economic growth. Since firms cannot directly own human capital and cannot easily monitor or verify human capital investments made by their employees, they need to devise appropriate incentives to attract skilled employees and to encourage them to develop their human capital. One such scheme is employee ownership of the firm, and in this paper we use the theory of incomplete contracts to show that when investments in human capital are relatively more important, firms should be characterized by higher levels of employee ownership. Specifically, we employ a model of the firm where production requires both human capital and nonhuman (e.g., physical) capital. Because of the difficulty of ex ante contracting with employees and managers to invest in human capital specific to the firm, employees and users need to be given partial ownership of firm in order to increase their incentives to invest in human capital. As the importance of human capital relative to the physical capital employed by the firm increases, the model predicts an increase in the appropriate level of employee and serial ownership. We test this prediction through the empirical analysis of firm-level data in three high tech sectors, software, hardware, and biotechnology. Our results confirm the predicted relationship, and demonstrate that the high degree of managerial ownership in the IT industry in comparison to the biotechnology industry (e.g., managerial ownership in software companies is an order of magnitude higher than biotechnology companies) can be explained by the relative importance of human capital compared to physical capital in these industries.

Citation Information
Shinkyu Yang, Heekyung Kim and Yannis Bakos. "Why Information Technology Workers Own Their Firms: How the Relative Importance of Human Capital Affects Firm Ownership" (2003)
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