Profit Sharing With Heterogeneous Entrepreneurial Prowess

Abstract

This paper analyses the impact of the compulsory adoption of profit sharing on the incentives that individuals face to set up their own business. It presents a model of capital accumulation in which individuals are equally skilled to be workers but differ in their abilities to manage a firm. It is shown that the mandatory imposition of profit sharing can inhibit entrepreneurial initiatives, reducing the number of firms in operation, the aggregate output and the economy's long run capital stock. It is also shown an example where, despite its deleterious consequences. mandatory profit sharing could be introduced in a democratic society if this choice were put to vote.