Productive Efficiency, Incentives and Employee Participation: Some Preliminary Results for West Germany

The effects of individual economic incentives are modified by social interactions among cooperating members of an organization such as the firm. An economic theory of such interaction, based on individual rationality or utility maximization, is briefly outlined, and various hypotheses on the effects of profit-sharing, piece-rates, and employee participation in decision-making are derived. These hypotheses are tested on data collected from smaller West German firms with various participation and profit-sharing schemes, independent of legal co-determination requirements. The predicted positive effect of participation, and of profit-sharing combined with participation on productivity is confirmed, in contrast to received theory.