Social Welfare and Profit-Sharing Rule in a Unionised Duopoly with Profit Tax/Subsidy

Abstract

This paper investigates the effects of the introduction of a profit-sharing rule and a profit tax/subsidy (T/S) policy on social welfare in a Cournot duopoly in the presence of decentralized firm-union bargaining over wage rates. It is shown that 1) the social welfare is always increasing in the share of profits distributed to workers and profit taxation is not neutral: the optimality rule prescribes complementarity in their use; 2) although an increasing profit-sharing parameter has conflicting effects (i.e. the net profit accruing to the firms reduces, workers and consumers’ welfare increase), a sufficiently high profit-sharing rule may be in the interest of the society, because it allows for eliminating the inefficiency due to the labour market imperfections. Moreover, we show that a “third best” optimal social welfare (given the institutional constraint of a non-negative wage rate) can be achieved. Interestingly, in this case, firms and workers achieve the maximal welfare. Therefore, we argue that profit- subsidisation may be used for motivating firms to apply the “socially optimal profit-sharing rule”, which warrants Pareto-superior outcomes for producers (firms and workers) (for instance, in the special case of monopoly unions and perfect substitute goods, the rule corresponding to a 50 per cent net profit share distributed to workers, jointly with a 50 per cent profit subsidisation).