Profit-sharing, Asymmetric Information and Employment
Abstract
Optimal profit-sharing is analyzed in this paper in a partial equilibrium framework in which a utilitarian monopoly union is assumed to he able to impose the parameters of the sharing scheme on a risk neutral firm. Införmation is assumed to he asymmetric in the sense that only the firm knows the marginal revenue product of labour and can thus make the employment decision conditional on its realized value. The share contract specifies remuneration per employee as the sum of a basic wage and a share in net profits per worker. It is shown that the share parameter is devised so as to generate the desired income distrihution whereas the hasic wage rate is chosen to satisfy conditions för risk-sharing and allocative efficiency. The hasic rate is shown to exceed the alternative wage level. The resulting underemployment is interpreted as the social cost of asymmetric information. The result is contrasted with the common view that profit-sharing has an expansionary effect on output and employment.
- ISSN: 0357-9603
- ISBN: 951-9281-88-6
