Abstract

This paper investigates the interaction effect of works councils and managerial profit sharing on establishment performance. In the theoretical part, it is argued that this interaction effect depends on two relationships, namely the relationship between works councils and self-enforcing contracts and the relationship between agency and trust within establishments. The empirical analysis with data from German manufacturing establishments shows a negative interaction effect of managerial profit sharing and works councils on productivity. Works councils seem to be of particular importance for the economic success of establishments when no managerial profit sharing is in place. The theoretical interpretation of this finding is, however, complex. Moreover, it is implicitly shown that the negative interaction effect is particularly prevalent in larger establishments. Separate estimates are performed with a subsample of establishments employing 21 to 100 workers. While the estimates show positive productivity effects of managerial profit sharing and works councils also for this subsample of smaller establishments, no statistically significant interaction effect is found.