The
organization of human capital-intensive activity: When does it pay to separate
ownership from labor
The organization of human
capital-intensive activity poses a unique challenge because much of the assets
employed are not proprietary to the firm. This often necessitates the unison of
ownership and labor with the same set of individuals - manifest in the
partnership form of organization. However, empirical observation reveals that
human capital-intensive activity is often organized as non-partnerships and
organization form choices do not always explain the surplus accruing to the
owner. In an effort to address this puzzle, we ask, what are the conditions
under which the separation of ownership from labor limits the “grab and leave”
propensity of human capital? Our theory builds on the simple idea that the
separation of ownership from labor helps the firm owner only if the human
capital-intensive activity is team-specific. Increasing the team-specificity of
an individual’s skill or contribution simultaneously reduces both the “grab” and
the “leave” options of human capital. We argue that building team-specificity
takes time especially where tacit knowledge and communication is involved. We
identify three important levers for managing this tacit knowledge creation and
transmission process – recruitment of human capital, stability of
human capital, and the nature of incentives. Using data on National
Basketball Association teams from 1991-2005, we first estimate a player wage
equation and show that the greater the team-specificity, the lower the wages
that accrue to a player. We then estimate a team-specificity equation and show
that the recruitment of team-oriented players and greater team stability
increases team-specificity whereas short term incentives undermine it. We
discuss the implications of our theory and results for the organization of human
capital-intensive activity in a variety of settings such as consulting firms,
law firms, investment banks, and universities.