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Profit Sharing Regulation, Repeated Bargaining and Shut-Down Option

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  • M. Moretto
  • G. Rossini

Abstract

We analyse the behavior of a firm where workers share profits with shareholders by using a model cast in an Aoki framework. Our firm faces two sorts of uncertainty: one relates to the market price assumed to follow a random walk in continuous time and the other relates to internal organization, i.e. the share of profits to be distributed between workers and shareholders. The firm is assumed to be flexible, since it has the possibility of shutting down by paying laid off workers a bonus, which represents a sunk cost for the firm. The distributive share is determined through a bargaining that takes place in two occasions: at the beginning of the firm’s life and when its profits reach a certain threshold level. The second bargaining is then endogenized according to a rule that is imposed upon shareholders and workers by a regulator who may use profit distribution as a way to regulate the firm. Different share parameter patterns will result as the regulator calls for renegotiation when profits are increasing or decreasing. Moreover we distinguish between a case in which the regulator’s rule is announced in advance from the one in which it is discretionally set.

Suggested Citation

  • M. Moretto & G. Rossini, 1995. "Profit Sharing Regulation, Repeated Bargaining and Shut-Down Option," Working Papers 237, Dipartimento Scienze Economiche, Universita' di Bologna.
  • Handle: RePEc:bol:bodewp:237
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