Profit Sharing and Incentives

International Journal of Industrial Organization

Economics

International Journal of Industrial Organization 2022 Vol 83

Ozdenoren E;Rubanov O

Emre Ozdenoren

2022

We model a firm as a team production process subject to moral hazard and derive the optimal profit sharing scheme between productive workers and outside investors together with incentive contracts based on noisy performance signals. More productive agents with noisier performance signals are more likely to receive shares which can explain why managers are motivated by shares, and law or consulting firms form partnerships. A firm that grows by opening branches is held almost entirely by outside investors when its output noise grows faster than the number of branches. Otherwise, insiders hold substantial amount of a large firm’s shares.

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