Oligopoly profit-sharing contracts and the firm's systematic risk

This article examines the properties of wage and profit-sharing contracts i n a model of oligopoly with capital market equilibrium. While profit-sharin g contracts dominate market wage contracts, profit-sharing also reduces the firm's cost of equity capital under fairly broad conditions of oligopoly, by enforcing lower costs in exchange for a predetermined share of cash-flow s to workers. This form of operational leverage both reinforces the classic al effect of market power on systematic risk and the impact of profit-shari ng on the corporate finance of the firm, as previously suggested by Ichino (1994, European Economic Review 38, 1411-1422). (C) 1999 Elsevier Science B .V. All rights reserved.