Profit sharing Pareto-dominates fixed wage contracts if unions care about employment. Specifically, the bargain over both a base wage and a share parameter yields an efficient contract off the labour demand schedule. Despite this, profit sharing is rather the exception than the rule. We show that this puzzle can be understood due to difficulties of plausible changeover scenarios between the two remuneration systems. We show that unions will not necessarily accept a share contract that leaves total expected wages constant at the employment level gen-erated by the fixed wages in effect, whereas firms will reject share contracts that do not affect the expected total wage. Moreover, firms have no incentive to unilaterally offer some share contract. We find four necessary conditions for a changeover which is incentive compatible for both trade unions and firms.
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Paper provided by University of Kassel, Institute of Economics in its series Discussion Papers in Economics with number
94/07.