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Legal Profit-Sharing: Shifting the Tax Burden in a Dual Economy

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    Abstract

    What are the consequences of laws imposing profit-sharing rates in the compensation of all forms of labor, when only a limited share of the productive sector is really making profit ? This problem is examined in the case of competitive labor markets, when firms of the profitable sector are facing a predetermined participation constraint. The proposed model details how legal profit-sharing contracts offer a form of evasion from wage-based social contributions in permitting substitution of wages with contingent claims on profits. Labor contracts are examined in a context in which effort is monitored or in which free-riding effects thwart the incentive effects of profit-sharing.

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    File URL: http://www.essec.fr/faculty/showDeclFileRes.do?declId=1967&key=__workpaper__
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    Bibliographic Info

    Paper provided by ESSEC Research Center, ESSEC Business School in its series ESSEC Working Papers with number DR 04011.

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    Length: 23 pages
    Date of creation: Aug 2004
    Date of revision:
    Handle: RePEc:ebg:essewp:dr-04011

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    Postal: ESSEC Research Center, BP 105, 95021 Cergy, France
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    Web page: http://www.essec.edu/
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    Keywords: Profit-sharing; Incentives; Labor contract;

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    1. Bengt Holmstrom, 1981. "Moral Hazard in Teams," Discussion Papers 471, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. Edward P. Lazear, 2000. "The Power of Incentives," American Economic Review, American Economic Association, vol. 90(2), pages 410-414, May.
    3. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-28, March.
    4. Bengt Holmstrom, 1997. "Moral Hazard and Observability," Levine's Working Paper Archive 1205, David K. Levine.
    5. Kandel, Eugene & Lazear, Edward P, 1992. "Peer Pressure and Partnerships," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 801-17, August.
    6. A. B. Atkinson, 1999. "The Economic Consequences of Rolling Back the Welfare State," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262011719, December.
    7. Bensaid, Bernard & Gary-Bobo, Robert J., 1991. "Negotiation of profit-sharing contracts in industry," European Economic Review, Elsevier, vol. 35(5), pages 1069-1085, July.
    8. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
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