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Profit-Sharing as Tax Saving and Incentive Device

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    The theory of labor contract with worker’s chosen effort level mainly rests upon the principal-agent paradigm. In many labor markets however, the principal is not as free as assumed in the standard theory, but is submitted to some binding institutional constraints. It is requested in particular to post a wage level, i.e. a non random component of compensation to which high rates of social contribution may apply. The proposed model adapts the standard analysis to situations in which tax rules and possibly predetermined profit-sharing patterns interfere with free contracting. It formalizes the two-faced aspect of profit sharing having an impact on the firm’s objective through tax saving effect and incentive effect.

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    File URL: http://www.essec.fr/faculty/showDeclFileRes.do?declId=1966&key=__workpaper__
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    Paper provided by ESSEC Research Center, ESSEC Business School in its series ESSEC Working Papers with number DR 04012.

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    Length: 24 pages
    Date of creation: Oct 2004
    Date of revision:
    Handle: RePEc:ebg:essewp:dr-04012
    Contact details of provider: Postal: ESSEC Research Center, BP 105, 95021 Cergy, France
    Web page: http://www.essec.edu/
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    1. Kandel, E. & Lazear, E.P., 1990. "Peer Pressure and Partnerships," Papers 90-07, Rochester, Business - Managerial Economics Research Center.
    2. HOLMSTROM, Bengt, . "Moral hazard and observability," CORE Discussion Papers RP -379, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    3. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
    4. Bengt Holmstrom & Paul R. Milgrom, 1985. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Cowles Foundation Discussion Papers 742, Cowles Foundation for Research in Economics, Yale University.
    5. 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.
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