Profit sharing, risk sharing, and firm size: Implications of efficiency wages

By taking account of output fluctuations, this paper constructs a synthesis of profit-sharing and efficiency-wage models to highlight the role of the risk attitudes of the firm and its employees. We show, contrary to the traditional efficiency wage theory, that in a profit-sharing economy unemployment is no longer a necessary device to induce work effort and, consequently, the labor market equilibrium may be characterized by full employment. Such a result is more likely to be true when the economy is characterized by small-sized firms. In addition, we also provide a preliminary sketch of the situations in which the firm chooses a profit-sharing program or a fixed-wage one, and discuss how a firm determines its pay parameters and employment in response to output fluctuations.