On the Efficiency of Profit Sharing and Labor Participation in Management

This paper attempts a generalization of both the theory of the labor-managed firm and that of the managerial firm by allowing all members of the firm to participate in decisionmaking and sharing of profits. We demonstrate that under rather plausible assumptions, and independently of the objective function of the firm, some profit sharing and participation in decisionmaking are required for Pareto efficiency. The allocation relations for factors of production that obtain under different decision-making structures are shown to be substantially different from each other and also different from what pure profit maximizing would indicate.