Oligopoly profit-sharing contracts and the firm's systematic risk

  • Bughin J
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Abstract

This article examines the properties of wage and profit-sharing contracts in a model of oligopoly with capital market equilibrium. While profit-sharing contracts dominate market wage contracts, profit-sharing also reduces the firm's cost of equity capital under fairly broad conditions of oligopoly, by enforcing lower costs in exchange for a pre-determined share of cash-flows to workers. This form of operational leverage both reinforces the classical effect of market power on systematic risk and the impact of profit-sharing on the corporate finance of the firm, as previously suggested by Ichino (1994, European Economic Review 38, 1411-1422).

Author-supplied keywords

  • CAPM
  • Oligopoly
  • Profit-sharing

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Authors

  • J. Bughin

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