Uncertainty, hiring and firing costs, and the determinants of profit‐sharing rules

Abstract

We consider a firm run by a manager who acts on behalf of shareholders. The firm produces a commodity whose demand evolves stochastically over time. The firm's employees possess firm‐specific skills and knowledge and thus can bargain over profits with shareholders immediately before the firm hires or fires workers. The firm will distribute more portions of profits to employees when it incurs higher costs to hire or fire workers. In addition, as uncertainty in demand increases, the firm will distribute smaller (larger) portions of profits to employees if the firm does not have the option to fire (hire) workers.