Profit Sharing in Small Business: An Analysis of Risk and Incentive Effects

Two basic reasons for adopting a profit-sharing system are to provide workers with incentives for greater productivity, and to share the risk of business with workers. This paper contends that, on both grounds, profit sharing is more useful to small, as compared with large, businesses. The theoretical analysis also calls for a sharing design in which labour's share of profit will be higher in a smaller business.