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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. Bengt Holmstrom, 1981. "Moral Hazard in Teams," Discussion Papers 471, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. 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.
    3. 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.
    4. Kandel, Eugene & Lazear, Edward P, 1992. "Peer Pressure and Partnerships," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 801-17, August.
    5. Bengt Holmstrom, 1997. "Moral Hazard and Observability," Levine's Working Paper Archive 1205, David K. Levine.
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