This paper examines the effect of introducing profit-sharing arrangements into union-firm contracts. It is shown that if bargaining is efficient (using the generalized Nash bargain), profit-sharing has no effect on the bargaining outcome. This is true both when the profit-sharing restriction is exogenously imposed by legislation and when profit sharing is part of the optimal contract. However, if the initial bargaining process is inefficient because direct negotiation on total employment is precluded, an optimal contract can use profit sharing to establish the efficient bargaining outcome. Both types of bargaining models have been employed in the literature.
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