Profit Sharing in Renewable Resource Industries: Implications for Labor and Investment

In renewable resource industries, labor is commonly paid with a share of operating profit rather than with a per unit-of-effort wage. This paper shows that the sharing agreements interact with fluctuations in the natural capital stock to cause inefficient investment levels and skew industry rents toward labor. As a consequence, optimal regulatory policy for such industries must account for the implications of such sharing arrangements on industry level investment. The model demonstrates why management tools like individual transferable quotas in fisheries, may have had unexpected ecological benefits in terms of increasing and stabilizing fishery stocks. The paper provides an illustrative example using the US Albacore fishery. JEL Classification: Q22, J31, D24, Q58