In this working paper we model contracting for joint production between workers and shareholders when investment in knowledge is non-verifiable, and the resulting specific human capital embedded int he workers is non-tradable.

The model provides sufficient conditions for workers becoming stakeholders of the firm, and conditions under which it is in the interest of shareholders to empower workers and/or increase their employability as a way to motivate workers’ investment in knowledge. Problems of implementation of bilateral and trilateral governance mechanisms for the knowledge-intensive firm, which substitute for the hierarchical, shareholder-oriented mechanism of the physical capital-intensive firm, are highlighted.