Profit sharing, worker effort, and double-sided moral hazard in an efficiency wage model

This paper develops a double-sided moral hazard model to examine the productivity and employment effects of an intensifying profit-sharing scheme. We show that, in order to obtain the productivity-enhancing and employment-expanding effects, a profit-sharing scheme needs a supportive element of true sharing by the employer. If a double moral hazard exists for the worker's effort and the firm's declaration of true profits, a sharing scheme involving larger profit-related pay is not necessarily an effective policy for boosting work morale and employment. However, if the firm-side moral hazard problem is absent, the favorable effects of profit sharing are achieved. (C) 2003 Association for Comparative Economic Studies. Published by Elsevier Science (USA). All rights reserved.