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Profit Sharing, Investment and Flexible Wages

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  • Lars Haagen Pedersen

    (Institute of Economics, University of Copenhagen)

Abstract

In Weitzman's 1983 paper on alternative compensation systems he proves that all compensation ssytems have the same long run equilibria. Weitzman defines long run equilibrium as the equilibrium in which the wage rate is perfectly flexible and the labor market is frictionless. Weitzman infers that his proof applies to economies with both capital and labor as input even though he considers an economy with labor input only. Here we consider a model where investments are governed by Tobin's q, and shows that the long run equilibrium (the stationary state of the model) depends crucially on the type of compensation system. In our model there exists a unique profit sharing system which is not Pareto dominated by the ordinary wage scheme.

Suggested Citation

  • Lars Haagen Pedersen, 1989. "Profit Sharing, Investment and Flexible Wages," Discussion Papers 89-13, University of Copenhagen. Department of Economics.
    • Handle: RePEc:kud:kuiedp:8913
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