Profit Sharing and Reciprocity Theory and Survey Evidence

The 1/n Problem potentially limits the effectiveness of profit sharing in motivating workers. While the economic literature suggests that reciprocity can mitigate this problem, it remains silent on the optimal degree of reciprocity. We present a representative model demonstration that reciprocity may increase productive effort but may also increase unproductive effort such as socializing on the job. The model implies that reciprocity increases profit up to a point but decreases profit beyond that point. Using detailed survey measures of worker reciprocity, we show that the probability of receiving profit sharing takes an inverse U-shape as reciprocity increases. This supports the general implication of the model and is Shown to exist for both Positive and negative reciprocity and to remain when a series of ability proxies and detailed industry indicators are included.

Professor John S. Heywood is Professor of Economics and Director of the Masters Program in Human Resources and Labor Relations at the University of Wisconsin-Milwaukee in the USA. As well, he is Senior Research Fellow at the University of Birmingham in the UK, and has been Visiting Professor at Lancaster University and the University of Hannover in Germany, and Visiting Research Scholar at the University of Melbourne.