We investigate the effect of profit-sharing on product and process innovation. Profit-sharing is
a credible commitment of the companies to let the employees participate in any efficiency
gain. Resistance against technical progress becomes less plausible. Moreover, employees are
stimulated to share their specific information advantage on possibilities to optimize the
production process and products with the management. We take account of possible
selectivity effects and using survey data on German companies with and without profitsharing
in a conditional difference-in-differences framework, we test our hypothesis by
comparing measures of innovativeness. Based on matching (selectivity on observable
covariates) in a static comparison firms with a share system show both more product and
process innovations. In a dynamic setting, we find that the introduction of profit-sharing only
spurs product innovation.
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