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• We measure whether profit sharing (PS) influences firm innovation • We disentangle PS effects across organizational groups within the firm • PS for managers is associated with little or no improvement in innovation • PS for non-managers spurs innovation probability by 5%-12%. • Size, unionization, exposure on international markets moderate PS effects In this paper, we measure whether contractual profit sharing (PS) influences firm innovation and, if yes, how. We disentangle PS effects for different and possibly conflicting interest groups within the firm. We exploit the fact that PS schemes rarely cover the workers all together, but more often than not are used at some organizational layer in the corporate hierarchy and not at others. Based on the analysis of a representative sample of Italian firms, the key contribution of the study is to show that the structure of PS plans matters significantly for innovation. While PS for managers is associated with little or no improvement in innovation activity, PS for non-managers spurs the probability of observing innovation by about 5 to 12 percentage points. The difference between managerial and non-managerial PS effects appears wider for process, arguably incremental innovation. We also document how PS effects, particularly for non-managers, change depending on other firm level variables, such as size, unionization, exposure on international markets, the span of managerial control and some characteristics of the workforce. Policy implications are discussed. [ABSTRACT FROM AUTHOR]

Compares models of individual and group incentives. Reduction of monitoring costs in group incentives; Association between profit sharing and productivity; Effect of profit sharing on firms that still rely on individual incentives.