On the Incidence of Profit Sharing

Robert W Drago () and Geoffrey K. Turnbull
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Robert W Drago: University of Wisconsin - Milwaukee

Working papers from University of Wisconsin - Milwaukee

Abstract: We examine the impact of industry demand conditions on workers' propensity to free ride under profit sharing. Allowing the firm to respond to worker behavior and the market to adjust to worker and firm behavior, we find workers tend to restrict output by shirking where industry demand is inelastic, in which case the firm will avoid profit sharing. Only where demand is elastic will workers have the incentive to avoid free riding and the firm the incentive to employ a sharing scheme. The analysis is generally consistent with empirical research and provides several novel predictions.

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Forthcoming Journal of Economic Behavior and Organization

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