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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]

• We study micro credit contracts that are based on profit sharing and hence compliant with the Islamic (i.e. Shari'ah) injunction regarding not charging interest. • Profit sharing loans provide borrowers better insurance for borrowers but also exacerbate the problem of strategic default. • We then consider a peer monitoring mechanism that harnesses locally available information to mitigate the problem of strategic default. • With peer monitoring, under certain conditions we show that the Shari'ah compliant loans can yield greater borrower welfare than interest bearing loans. Many Muslims, abiding by injunctions of Shari'ah law, avoid using credit market institutions that charge interest. Due to this constraint, current best estimates suggest that in some Muslim majority countries, around 20% of the poor opt not to participate in microcredit programs. This paper is a theoretical contribution towards increasing financial inclusion of the Muslim poor. We study methods to make micro lending Shari'ah compliant, based on profit sharing in which there is a possibility of strategic default. We show that introducing a new peer-monitoring mechanism, whereby agents are incentivized to report on each other's profits, can be used along with profit sharing, and in so doing, improve upon the individual borrower, profit-sharing contracts. We then compare interest-based lending with profit-sharing lending in both individual and peer-monitoring settings and show conditions under which profit-sharing contracts with peer monitoring, outperform interest-based contracts in terms of borrower welfare. [ABSTRACT FROM AUTHOR]

We study the performance effects of two profit sharing schemes in a simplified representation of an organization with high task interdependence. The production process involves three stages such that output of earlier stages is the necessary input for subsequent stages. Work at earlier stages is easier than at later stages and the product is only final if it goes successfully through the highest stage. We compare the effects on the performance of the organization of a payment scheme in which profits are equally shared by all those involved in the production process with one where the participation in profits is strongly increasing in the production stage. The comparison is made for two ways of assigning individuals to the production stage: randomly or by merit. We also study the distinction between sharing schemes that are exogenously imposed and those that are chosen by the person at the top of the hierarchy. We find that overall the type of payment scheme has no effect on profits. We also find that profits increase over time and more so with the equal than with the unequal sharing scheme. The high interdependence in production that we study makes steep incentives ineffective and even counter-productive. These changes in profits over time can be explained by changes in production performance over time. We also find that merit-based assignment to positions in the hierarchy leads to significantly higher profits than random assignment. [ABSTRACT FROM AUTHOR]

Abstract: Microfinance has been identified as an important tool in increasing the productivity of the poor and in aiding economic development. However, a large proportion of the poor are practicing Muslims, and are thus unable to take advantage of traditional microfinance contracts which involve the payment of interest. This paper describes and experimentally tests Islamic-compliant microfinance products in the context of information asymmetry and costly state verification. We find significantly higher compliance rates for the Islamic-compliant contracts (profit-sharing and joint venture) than for the traditional contract (interest-based). We believe that there is great promise for these types of loans in the microfinance context, for both Muslims and non-Muslims. [Copyright &y& Elsevier]

Abstract: This paper presents a model showing that profit sharing is subject to the 1/N problem in the case of independent worker productivity but not in the case of interdependent worker productivity. This implies the role of firm size on the likelihood of profit sharing will differ by the nature of the underlying technology. We test this implication using German establishment data and using a proxy for interdependent worker productivity. The results conform to the theory showing that firm size is associated with reduced profit sharing use when technology is independent but not when technology is interdependent. [Copyright &y& Elsevier]

Investigates variations in the adoption of different organizational practices and productivity using a survey of the Canadian textile industry. Monitoring and profit-sharing as substitutes; Effectiveness of the practices in eliciting employee performance; Profit-sharing in small and large firms.

Addresses the issue of how equity shares are different from profit shares. Marketable equity ownership and non-transferable profit sharing contracts in settings of contractual incompletness; Prevalence of equity joint venture in which one party has 51 percent equity shares.

Examines the impact of industry demand conditions on worker's propensity to free ride under profit sharing. Nature of produced goods; Appearance of sharing schemes on uncertainty in demand; Profit sharing's employment stabilizing effects; Increased productivity and profit generated through sharing schemes; Suggestion on the free riding of profits.

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.