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Profit Sharing, Risk Sharing, and Firm Size: Implications of Efficiency Wages

  • Juin-Jen Chang


By taking account of output fluctuations, this paper constructs a synthesis of profit-sharing and efficiency-wage models to highlight the role of the risk attitudes of the firm and its employees. We show, contrary to the traditional efficiency wage theory, that in a profit-sharing economy unemployment is no longer a necessary device to induce work effort and, consequently, the labor market equilibrium may be characterized by full employment. Such a result is more likely to be true when the economy is characterized by small-sized firms. In addition, we also provide a preliminary sketch of the situations in which the firm chooses a profit-sharing program or a fixed-wage one, and discuss how a firm determines its pay parameters and employment in response to output fluctuations. Copyright Springer 2006

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Article provided by Springer in its journal Small Business Economics.

Volume (Year): 27 (2006)
Issue (Month): 2 (October)
Pages: 261-273

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Handle: RePEc:kap:sbusec:v:27:y:2006:i:2:p:261-273
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  1. Douglas L. Kruse, 1993. "Does Profit Sharing Affect Productivity?," NBER Working Papers 4542, National Bureau of Economic Research, Inc.
  2. Martin J. Conyon & Richard B. Freeman, 2002. "Shared modes of compensation and firm performance: UK evidence," LSE Research Online Documents on Economics 20060, London School of Economics and Political Science, LSE Library.
  3. Douglas L. Kruse, 1993. "Profit Sharing: Does It Make a Difference?," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number ps, April.
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