Social Welfare and Profit-Sharing Rule in a Unionised Duopoly with Profit Tax/Subsidy

Luciano Fanti and Domenico Buccella

Hacienda Pública Española / Review of Public Economics, 2018, vol. 226, issue 3, 59-84

Abstract: This paper investigates the effects of the introduction of a profit-sharing rule and a profit tax/subsidy (T/S) policy on social welfare in a Cournot duopoly in the presence of decentralized firm-union bar¬gaining over wage rates. It is shown that 1) the social welfare is always increasing in the share of profits distributed to workers and profit taxation is not neutral: the optimality rule prescribes comple¬mentarity in their use; 2) although an increasing profit-sharing parameter has conflicting effects (i.e. the net profit accruing to the firms reduces, workers and consumers’ welfare increase), a sufficiently high profit-sharing rule may be in the interest of the society, because it allows for eliminating the inef¬ficiency due to the labour market imperfections. Moreover, we show that a “third best” optimal social welfare (given the institutional constraint of a non-negative wage rate) can be achieved. Interestingly, in this case, firms and workers achieve the maximal welfare. Therefore, we argue that profit- subsidisa¬tion may be used for motivating firms to apply the “socially optimal profit-sharing rule”, which war¬rants Pareto-superior outcomes for producers (firms and workers) (for instance, in the special case of monopoly unions and perfect substitute goods, the rule corresponding to a 50 per cent net profit share distributed to workers, jointly with a 50 per cent profit subsidisation).

Keywords: Profit-sharing; profit tax/subsidy; social welfare; unions; Cournot duopoly (search for similar items in EconPapers)
JEL-codes: H25 J3 J51 L13 (search for similar items in EconPapers)
Date: 2018
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