The use of profit sharing when workers make decisions: Evidence from a survey of manufacturing workers

This paper examines the observed complementarity between the use of profit sharing and the delegation of decision making power to production line workers. The paper makes use of a new economy wide data set which provides information on pay and decision making for a large number of production workers. A principal-agent model is presented to guide the empirical analysis. An empirical model is presented that allows the use of profit sharing and the delegation of decision making power to be explicit complements and for this complementarity to vary with observable and unobservable characteristics of the workers. Two major results are derived from the theoretical model and supported by the empirical analysis. First, workers with greater than two years experience are more valuable decision makers. Second, conditional on the worker having decision making, profit sharing is of a greater value to the firm when demand for the firm's product is volatile.