Goods-market competition and profit sharing: a multisector macro approach

This paper develops a theoretical model that relates the degree of goods-market competition with the extent of profit sharing. Our multisector framework indicates that increased competition in goods markets leads to an increased weighting on firm profits in an optimally indexed contract. Consequently, our model predicts that a rising extent of profit-sharing arrangements in the United States should accompany an increase in the degree of goods-market competition. Available, but limited, data on profit sharing in the United States are generally consistent with this fundamental implication of the model.