diff --git a/lib/install/inflate-shrinkwrap.js b/lib/install/inflate-shrinkwrap.js
index bf1ab7065724c..395cc11191309 100644
--- a/lib/install/inflate-shrinkwrap.js
+++ b/lib/install/inflate-shrinkwrap.js
@@ -177,7 +177,7 @@ function makeFakeChild (name, topPath, tree, sw, requested) {
     realpath: requested.type === 'directory' ? requested.fetchSpec : childPath(tree.realpath, pkg),
     location: (tree.location === '/' ? '' : tree.location + '/') + pkg.name,
     isLink: requested.type === 'directory',
-    isInLink: tree.isLink,
+    isInLink: tree.isLink || tree.isInLink,
     swRequires: sw.requires
   })
   tree.children.push(child)
diff --git a/lib/shrinkwrap.js b/lib/shrinkwrap.js
index 90a4426523cab..5495892a25afb 100644
--- a/lib/shrinkwrap.js
+++ b/lib/shrinkwrap.js
@@ -110,11 +110,13 @@ function shrinkwrapDeps (deps, top, tree, seen) {
     var childIsOnlyDev = isOnlyDev(child)
     var pkginfo = deps[moduleName(child)] = {}
     var requested = getRequested(child) || child.package._requested || {}
+    var linked = child.isLink || child.isInLink
+    var linkedFromHere = linked && path.relative(top.realpath, child.realpath)[0] !== '.'
     pkginfo.version = childVersion(top, child, requested)
     if (requested.type === 'git' && child.package._from) {
       pkginfo.from = child.package._from
     }
-    if (child.fromBundle || child.isInLink) {
+    if (child.fromBundle && !linked) {
       pkginfo.bundled = true
     } else {
       if (isRegistry(requested)) {
@@ -139,7 +141,8 @@ function shrinkwrapDeps (deps, top, tree, seen) {
         pkginfo.requires[moduleName(required)] = childRequested(top, required, requested)
       })
     }
-    if (child.children.length) {
+    // iterate into children on non-links and links contained within the top level package
+    if (child.children.length && (!child.isLink || linkedFromHere)) {
       pkginfo.dependencies = {}
       shrinkwrapDeps(pkginfo.dependencies, top, child, seen)
     }
diff --git a/test/tap/install-at-sub-path-locally.js b/test/tap/install-at-sub-path-locally.js
new file mode 100644
index 0000000000000..e16b75179ebaf
--- /dev/null
+++ b/test/tap/install-at-sub-path-locally.js
@@ -0,0 +1,69 @@
+var fs = require('graceful-fs')
+var path = require('path')
+
+var mkdirp = require('mkdirp')
+var osenv = require('osenv')
+var rimraf = require('rimraf')
+var test = require('tap').test
+
+var common = require('../common-tap.js')
+
+var pkg = path.join(__dirname, 'install-at-sub-path-locally')
+
+var EXEC_OPTS = { cwd: pkg, stdio: [0, 1, 2] }
+
+var json = {
+  name: 'install-at-sub-path-locally-mock',
+  version: '0.0.0'
+}
+
+var target = '../package@1.2.3'
+
+test('setup', function (t) {
+  cleanup()
+  t.end()
+})
+
+test('\'npm install ../package@1.2.3\' should install local pkg from sub path', function (t) {
+  setup()
+  common.npm(['install', '--loglevel=silent', target], EXEC_OPTS, function (err, code) {
+    if (err) throw err
+    var p = path.resolve(pkg, 'node_modules/install-at-sub-path-locally-mock/package.json')
+    t.equal(code, 0, 'npm install exited with code')
+    t.ok(JSON.parse(fs.readFileSync(p, 'utf8')))
+    t.end()
+  })
+})
+
+test('\'running npm install ../package@1.2.3\' should not break on sub path re-install', function (t) {
+  common.npm(['install', '--loglevel=silent', target], EXEC_OPTS, function (err, code) {
+    if (err) throw err
+    var p = path.resolve(pkg, 'node_modules/install-at-sub-path-locally-mock/package.json')
+    t.equal(code, 0, 'npm install exited with code')
+    t.ok(JSON.parse(fs.readFileSync(p, 'utf8')))
+    t.end()
+  })
+})
+
+test('cleanup', function (t) {
+  cleanup()
+  t.end()
+})
+
+function cleanup () {
+  process.chdir(osenv.tmpdir())
+  rimraf.sync(pkg)
+  rimraf.sync(path.resolve(pkg, target))
+}
+
+function setup () {
+  cleanup()
+  var root = path.resolve(pkg, target)
+  mkdirp.sync(root)
+  fs.writeFileSync(
+    path.join(root, 'package.json'),
+    JSON.stringify(json, null, 2)
+  )
+  mkdirp.sync(path.resolve(pkg, 'node_modules'))
+  process.chdir(pkg)
+}
diff --git a/test/tap/shrinkwrap-local-dependency.js b/test/tap/shrinkwrap-local-dependency.js
index 58974ad72431a..d1c33b99a5a0b 100644
--- a/test/tap/shrinkwrap-local-dependency.js
+++ b/test/tap/shrinkwrap-local-dependency.js
@@ -20,8 +20,7 @@ var shrinkwrap = {
       version: 'file:' + unixFormatPath(path.join('mods', 'mod2')),
       dependencies: {
         mod1: {
-          version: 'file:' + unixFormatPath(path.join('mods', 'mod1')),
-          bundled: true
+          version: 'file:' + unixFormatPath(path.join('mods', 'mod1'))
         }
       }
     }
diff --git a/test/tap/spec-local-specifiers.js b/test/tap/spec-local-specifiers.js
index d149b7ea0ea3a..3601eee5f3c5f 100644
--- a/test/tap/spec-local-specifiers.js
+++ b/test/tap/spec-local-specifiers.js
@@ -585,9 +585,7 @@ test('save behavior', function (t) {
       var deps = pjson.dependencies || {}
       t.is(deps['sb-transitive'], 'file:../sb-transitive', 'package.json')
       var sdep = shrinkwrap.dependencies['sb-transitive'] || {}
-      var tdep = sdep.dependencies.sbta
-      t.like(tdep, {bundled: true, version: 'file:../sb-transitive/sbta'}, 'npm-shrinkwrap.json transitive dep')
-      t.like(sdep, {bundled: null, version: 'file:../sb-transitive'}, 'npm-shrinkwrap.json direct dep')
+      t.like(sdep, {bundled: null, dependencies: null, version: 'file:../sb-transitive'}, 'npm-shrinkwrap.json direct dep')
       t.done()
     })
   })