Modelling Profit-and-Loss Sharing

Paul S. Mills and John R. Presley
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Paul S. Mills: HM Treasury
John R. Presley: University of Loughborough

Chapter 4 in Islamic Finance: Theory and Practice, 1999, pp 34-48 from Palgrave Macmillan

Abstract: Abstract The theoretical benefits and limitations of a non-interest financial system bear a close resemblance to those of Weitzman’s (1983, 1984, 1985, 1987) proposal to replace flat-rate wages with profit- or revenue-sharing labour remuneration arrangements. He assumes monopolistically competitive firms and long-run full employment equilibrium, but ‘sticky’ wages and prices due to implicit contracts with `insider’ workers (e.g. 1984, p. 34ff). Wage contracts allocate labour efficiently in equilibrium but can yield prolonged stagflation following an aggregate demand shock (ibid., p. 42ff). By replacing wages with a profit-sharing system, Weitzman believes that the marginal cost of employing an extra worker to the firm will always be less than their marginal revenue product, even at full employment levels (ibid., pp. 85–7).1

Keywords: Capital Investment; Asymmetric Information; Incentive Compatibility; Optimal Contract; Production Decision (search for similar items in EconPapers)
Date: 1999
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-28847-8_4

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DOI: 10.1057/9780230288478_4

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