Profit Sharing and Incentives

• We study how profits of a firm should be shared in the most efficient way among heterogeneously productive, risk averse workers, and an unproductive outside investor. model as team production process subject to moral hazard. In addition awarding shares, can use incentive contracts based on noisy performance signals. show that more productive agents with noisier signals are likely motivated shares opposed contracts. Since efforts who have soft skills, such managers, difficult observe, this result provides potential explanation for why managers firms by shares. Our results also suggest law or consulting firms, where agents’ often organized partnerships. investor holds only if all hold ask whether large less owned investors. find grows opening branches is held almost entirely investors when its output noise faster than number branches. Otherwise, insiders substantial amount firm’s hazard derive optimal profit sharing scheme between workers together More receive which explain form A