Implementing the share economy.

• Author: Lacivita, Charles J.

1. Introduction

   In a recent series of papers and books, Weitzman [11; 12; 13] has put forward a new policy prescription for the macroeconomy. In Weitzman's view, significant improvements in the performance of the macroeconomy can be achieved by altering key structural relationships, specifically the wage contract between workers and firms. Weitzman labels this approach the "share economy", because worker's wages are no longer contracted for in nominal terms but vary with an index of the firm's performance, usually profits. That is, the workers "share" in the firm's success or failure. The point of Weitzman's work is not that participation increases worker's motivation or productivity. In Weitzman's view, share contract wage agreements create a pool of latent excess demand for labor within firms. Firms then behave in the labor markets as buyers who would expand employment at the going wage if they could. This contrasts with the more familiar case where firms are willing to expand employment only if the wage is reduced. Weitzman's claims for economies implementing share contracts are impressive: lower natural unemployment rates, less susceptibility to layoffs caused by macroeconomic shocks, and reduced inflation.

   In Weitzman's world, firms are monopolistic competitors operating under increasing returns to scale. It is these two features that lead to wage and price inflexibility and therefore to potential unemployment [10].(1) Weitzman makes his case for the share economy by examining a transition economy where "conversion from a wage system to an equivalent profit-sharing system yields the same pay" [13, 945]. Even in this case, where total payments to workers are identical, Weitzman shows that "the share economy expands output and employment while lowering price" [13, 945]. Although conversion to a share economy may seem desirable from a macroeconomic view, Weitzman notes that a macroeconomic externality exists which prevents individual firms from converting to a share wage system. The externality arises due to the assumption of increasing returns: If a firm unilaterally adopts a share wage, its workers will be worse off since their wages will decline as more workers are hired. However, the income of the additional workers leads to an increase in total effective demand. This causes an increase in demand for the products of other firms, whose workers benefit from an increase in their wages. As a result, the government must subsidize firms to entice them to adopt a share wage.

   Implicit in Weitzman's writings is the idea that a share wage economy results in a higher level of welfare than does a fixed wage economy. Cooper [3] has shown that, in general, the share economy does not produce a Pareto improvement over the wage economy.(2) Using a two-sector economy, he shows that introducing a share wage into one sector produces Weitzman's macroeconomic externality, requiring government subsidization. However, the resulting income distribution weakly Pareto dominates that produced by a fixed wage only under an exact restriction on the share parameter.

   Neither Weitzman nor Cooper presents a microeconomic justification for either type of wage contract, although Weitzman suspects that the wage economy may be privately dominating. In this paper, we present a model which explains the reluctance of individual firms and workers to embrace a share wage system. Our approach differs from that of Weitzman in that we view the worker's decision environment as one of risk rather than uncertainty. Under conditions of risk, we examine the workers' and firms' incentives under the two types of labor contracts and find that the wage economy provides higher expected utility for most workers and higher expected profits for firms than does the share economy. Most importantly, this is true even if all firms adopt a share wage. Our analysis has two critical implications for the implementation of a share wage economy: First, firms will not voluntarily convert to a share wage system even if all firms are to convert simultaneously. This means that the government must either force firms to convert or subsidize their conversion. Second, even after all firms have converted, the government must continually subsidize them to keep them in the share system.

   To highlight the difference between Weitzman's subsidy and the subsidy required by our analysis, we assume that all firms simultaneously adopt a share wage system. We do this not to suggest that the realism of the model is enhanced, but to draw a sharp distinction between subsidization due to Weitzman's macroeconomic externality and the subsidization our analysis indicates is necessary to implement and maintain the share wage system. Our approach is similar to that Azariadis [1], who shows that in a competitive economy, risk-averse workers and risk-neutral firms prefer a fixed wage contract that compensates the workers for relinquishing guaranteed employment. In Azariadis's model, all workers are identical and have the same probability of employment in a given state. Like Azariadis, we assume risk-averse workers and risk neutral firms. We differ from Azariadis in that the firms are monopolistically...