Abstract
In a traditional wage system the union and the firm bargain ex ante over a compensation level that does not depend on the state of the world. Under this regime both the wage and the interest earned by debt holders represent predetermined fixed claims on the value of the firm. On the other hand, in a profit sharing system the union and the firm bargain ex ante over a compensation schedule that does depend on the state of the world. In this case, the flexible compensation earned by workers becomes a residual claim on the value of the firm similar to the dividend earned by stock holders. The implications of this correspondence between compensation structure and financial structure are explored. The estimation of a model for the issuance of new long-term debt supports the hypothesis of interdependence between financial and compensation decisions.
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