diff --git a/lib/install/deps.js b/lib/install/deps.js
index 3fe370140adc3..a1c2ee4a68e5d 100644
--- a/lib/install/deps.js
+++ b/lib/install/deps.js
@@ -203,10 +203,15 @@ function removeObsoleteDep (child, log) {
 function packageRelativePath (tree) {
   if (!tree) return ''
   var requested = tree.package._requested || {}
-  var isLocal = requested.type === 'directory' || requested.type === 'file'
-  return isLocal ? requested.fetchSpec
-    : (tree.isLink || tree.isInLink) && !preserveSymlinks() ? tree.realpath
-      : tree.path
+  if (requested.type === 'directory') {
+    return requested.fetchSpec
+  } else if (requested.type === 'file') {
+    return path.dirname(requested.fetchSpec)
+  } else if ((tree.isLink || tree.isInLink) && !preserveSymlinks()) {
+    return tree.realpath
+  } else {
+    return tree.path
+  }
 }
 
 function matchingDep (tree, name) {
diff --git a/test/tap/install-local-from-local.js b/test/tap/install-local-from-local.js
new file mode 100644
index 0000000000000..681e2a723f276
--- /dev/null
+++ b/test/tap/install-local-from-local.js
@@ -0,0 +1,77 @@
+'use strict'
+var path = require('path')
+var fs = require('graceful-fs')
+var test = require('tap').test
+var common = require('../common-tap.js')
+var Tacks = require('tacks')
+var Dir = Tacks.Dir
+var File = Tacks.File
+
+var testdir = path.join(__dirname, path.basename(__filename, '.js'))
+var cwd = path.join(testdir, '3')
+
+var fixture = new Tacks(Dir({
+  '1': Dir({
+    '1-1.0.0.tgz': File(Buffer.from(
+      '1f8b08000000000000032b484cce4e4c4fd52f80d07a59c5f9790c540606' +
+      '06066626260ad8c4c1c0d85c81c1d8d4ccc0d0d0cccc00a80ec830353103' +
+      'd2d4760836505a5c925804740aa5e640bca200a78708a856ca4bcc4d55b2' +
+      '523254d2512a4b2d2acecccf03f1f40cf40c946ab906da79a360148c8251' +
+      '300a6804007849dfdf00080000',
+      'hex'
+    ))
+  }),
+  '2': Dir({
+    '2-1.0.0.tgz': File(Buffer.from(
+      '1f8b0800000000000003ed8f3d0e83300c8599394594b90d36840cdc2602' +
+      '17d19f80087468c5ddeb14a9135b91aa4af996e73c3f47f660eb8b6d291b' +
+      '565567dfbb646700c0682db6fc00ea5c24456900d118e01c17a52e58f75e' +
+      '648bd94f76e455befd67bd457cf44f78a64248676f242b21737908cf3b8d' +
+      'beeb5d70508182d56d6820d790ab3bf2dc0a83ec62489dba2b554a6598e1' +
+      'f13da1a6f62139b0a44bfaeb0b23914824b2c50b8b5b623100080000',
+      'hex'
+    ))
+  }),
+  '3': Dir({
+    'package.json': File({
+      name: '3',
+      version: '1.0.0',
+      dependencies: {
+        '2': '../2/2-1.0.0.tgz'
+      }
+    })
+  })
+}))
+
+function setup () {
+  fixture.create(testdir)
+}
+
+function cleanup () {
+  fixture.remove(testdir)
+}
+
+test('setup', function (t) {
+  cleanup()
+  setup()
+  t.end()
+})
+
+test('installing local package with local dependency', function (t) {
+  common.npm(
+    ['install'],
+    {cwd: cwd},
+    function (er, code, stdout, stderr) {
+      t.is(code, 0, 'no error code')
+      t.is(stderr, '', 'no error output')
+      t.ok(fs.existsSync(path.join(cwd, 'node_modules', '2')), 'installed direct dep')
+      t.ok(fs.existsSync(path.join(cwd, 'node_modules', '1')), 'installed indirect dep')
+      t.end()
+    }
+  )
+})
+
+test('cleanup', function (t) {
+  cleanup()
+  t.end()
+})