Profit Sharing and Incentives

58 Pages Posted: 9 Oct 2017

See all articles by Emre Ozdenoren

Emre Ozdenoren

London Business School; Centre for Economic Policy Research (CEPR)

Oleg Rubanov

London Business School

Date Written: October 2017

Abstract

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.

Suggested Citation

Ozdenoren, Emre and Rubanov, Oleg, Profit Sharing and Incentives (October 2017). CEPR Discussion Paper No. DP12355, Available at SSRN: https://ssrn.com/abstract=3049912

Emre Ozdenoren (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Oleg Rubanov

London Business School ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

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