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Modelling Profit-and-Loss Sharing

In: Islamic Finance: Theory and Practice

Author

Listed:
  • Paul S. Mills

    (HM Treasury)

  • John R. Presley

    (University of Loughborough
    The Saudi British Bank)

Abstract

The theoretical benefits and limitations of a non-interest financial system bear a close resemblance to those of Weitzman’s (1983, 1984, 1985, 1987) proposal to replace flat-rate wages with profit- or revenue-sharing labour remuneration arrangements. He assumes monopolistically competitive firms and long-run full employment equilibrium, but ‘sticky’ wages and prices due to implicit contracts with `insider’ workers (e.g. 1984, p. 34ff). Wage contracts allocate labour efficiently in equilibrium but can yield prolonged stagflation following an aggregate demand shock (ibid., p. 42ff). By replacing wages with a profit-sharing system, Weitzman believes that the marginal cost of employing an extra worker to the firm will always be less than their marginal revenue product, even at full employment levels (ibid., pp. 85–7).1

Suggested Citation

  • Paul S. Mills & John R. Presley, 1999. "Modelling Profit-and-Loss Sharing," Palgrave Macmillan Books, in: Islamic Finance: Theory and Practice, chapter 4, pages 34-48, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-28847-8_4
    DOI: 10.1057/9780230288478_4
    as

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