This research is directed at understanding better the nature,. functioning, and significance of alternative compensation systems, especially profit sharing. The potential importance of the topic stems from the idea that pay for performance may ultimately influence macroeconomic and microeconomic outcomes--perhaps especially as they relate to issues of international competitiveness. In this connection, it is interesting to note that Japan, Korea, and Taiwan all have significant bonus systems with strong profit.sharing overtones. At the present stage, unfortunately, the promise of profit sharing remains largely hypothetical because we do not yet understand nearly well enough the economic foundations for preferring one payment system over another. The current research is primarily an application of economic theory, which will improve understanding of important aspects of profit sharing in four areas. The first application will calculate the socially optimal degree of profit sharing by trading off income stability of those already employed against losses due to unemployment risk. The second application will calculate the effect of gain-sharing arrangements, which introduce greater possibilities for flexibility or reversibility, on the appropriate project-evaluation investment criteria that should be used for public enterprises. A third application will investigate various conditions under which profit sharing or pay for performance may influence work effort. The fourth application contrasts the effects of wage and sharing systems on labor market segmentation.
