This paper examines a principal’s trade-off when he decides whether to transfer knowledge to other members of the organization. Although knowledge makes an agent more productive (productivity effect), knowledge transfer could cause the agent to become selfemployed. The agent would then become a strong competitor of the principal (competition effect). I show that there is also an effort effect, which determines the principal’s optimal knowledge transfer and his preference for either a principal-agent relationship or a duopolistic competition with the agent. The principal’s decision depends crucially on whether knowledge transfer leads only to a relative competitive advantage for the agent, or additionally to an absolute advantage when the agent becomes self-employed. I also show that teamwork makes a principal-agent relationship more attractive for the principal and that such effort sharing leads to lower costs.
