Data Set and Econometric Methods

The review of the literature that has been presented so far should have made clear that research on the effects of profit sharing is far from being complete and that a number of issues remain to be resolved. The objective of this study is to contribute to the literature in several respects. Using nationally representative German firm panel data, we try to provide a comprehensive picture of profit sharing by investigating four questions: First, what are the output, employment and productivity effects of profit sharing? Second, does profit sharing imply lower base wages as proposed by Weitzman or is it rather paid as an add-on to regular wages? Third, what is the impact of profit sharing on the firms’ financial performance? And finally, fourth, how does the existence of a works council affect the performance of profit sharing? Owing to the availability of extensive longitudinal data, we are further able to handle the majority of methodological problems described. Before presenting the empirical evidence in the following chapter, the data set is briefly introduced followed by a discussion of econometric methods that deal with the issue of selectivity where we base our choice of estimator upon.