Employer-Employee Profit-Sharing and the Incentives to Innovate when the Dismissal Regulation Matters

We develop a simple incomplete-contract model of the relationship between worker participation to revenue sharing and innovation performance of firms, under firing regimes with different stringency. Stronger worker participation to profits is shown to increase innovation probability when employer-side hold-up is prevented by stringent layoff regulation and the human capital matters significantly. Vice-versa, under a strict layoff regulation, when the financial capital is relatively more important, the effects of worker participation devices may be reduced or inverted. Our results may help in understanding why there is no one-size-fits-all optimal strategy in the design of worker financial participation mechanisms for knowledge-intensive productions.