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Sharing Profits to Reduce Inefficient Separations

Author

Listed:
  • Kenneth Snellman

Abstract

This study argues that firms can use profit sharing to raise profits by reducing the risk for inefficient separations by the workers. It is based on the idea of Hall and Lazear (1984) and clarifies their analysis of fixed wage contracts in employment relations of fixed length. It extends their analysis to continuing employment relationships in which the base wage is exogenously given but the firm can unilaterally set a profit sharing parameter. It is argued that the use of down payments, on which the analysis of Hall and Lazear is based, is not possible with continuing employment relationships. Instead the bargaining power will be reflected in the base wage. This reduces the possibilities to adjust the base wage to reduce inefficient separations and may increase the importance of profit sharing. The intuitive positive dependence of the profit sharing parameter on the covariance between the value of the worker’s outside option and his productivity in the firm does not necessarily hold.

Suggested Citation

  • Kenneth Snellman, 2002. "Sharing Profits to Reduce Inefficient Separations," Working Papers 182, Työn ja talouden tutkimus LABORE, Labour Institute for Economic Research LABORE.
    • Handle: RePEc:pst:wpaper:182
    as

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    References listed on IDEAS

    as
    1. Carl M. Campbell III & Kunal S. Kamlani, 1997. "The Reasons for Wage Rigidity: Evidence from a Survey of Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(3), pages 759-789.
    2. Weitzman, Martin L, 1985. "The Simple Macroeconomics of Profit Sharing," American Economic Review, American Economic Association, vol. 75(5), pages 937-953, December.
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    4. David G. Blanchflower & Andrew J. Oswald & Peter Sanfey, 1996. "Wages, Profits, and Rent-Sharing," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(1), pages 227-251.
    5. repec:bla:scandj:v:97:y:1995:i:2:p:295-307 is not listed on IDEAS
    6. Stephen G. Bronars & Melissa Famulari, 2001. "Shareholder Wealth and Wages: Evidence for White-Collar Workers," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 328-354, April.
    7. John M. Abowd & Francis Kramarz & David N. Margolis, 1999. "High Wage Workers and High Wage Firms," Econometrica, Econometric Society, vol. 67(2), pages 251-334, March.
    8. Alan S. Blinder & Don H. Choi, 1990. "A Shred of Evidence on Theories of Wage Stickiness," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(4), pages 1003-1015.
    9. Coen Teulings & Joop Hartog, 1998. "Wages and Labour Market Institutions in International Comparison," Palgrave Macmillan Books, in: Isao Ohashi & Toshiaki Tachibanaki (ed.), Internal Labour Markets, Incentives and Employment, chapter 2, pages 19-48, Palgrave Macmillan.
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