Macrodynamic Implications of Employee Profit Sharing as Effort Elicitation Device

We devise a growth model where the distribution of factor income is affected by the possibility of profit sharing with workers. Firms choose periodically to compensate workers with only a real base wage or a share of profits in addition to this real base wage as alternative effort-elicitation strategies. As validated by empirical evidence, labor productivity is higher in profit-sharing firms than in non-sharing firms. The frequency distribution of effort-elicitation strategies and labor productivity across firms are co-evolutionarily time-varying, which then affects the dynamics of the distribution of income between profits and wages and therefore the savings-determined growth rate. Heterogeneity in effort-elicitation strategies across firms (and hence earnings inequality across workers) can be a stable long-run equilibrium. In such a polymorphic equilibrium, the frequency of profit-sharing firms varies positively (negatively) with the real base wage (profit-sharing coefficient). As shown analytically and with numerical simulations, the micro- and macrodynamics of the economy are crucially affected by the profit-sharing coefficient and the real base wage as bifurcation parameters.