Incentive profit-sharing rules joined with open-book accounting in SME networks

Profit-sharing rules applied together with open-book accounting are a synergetic combination that encourages SME networks to continuous innovation. This paper studies profit-sharing rules that work as incentives for cost reduction in networks. We describe a case study of a steel-roof manufacturing and assembly network, where profit sharing became relevant shortly after open-book accounting was successfully implemented. Moreover, we present a dynamic game theoretic model for the study of the desired characteristics of profit-sharing rules in such networks. We find that, under quite general assumptions, profit-sharing rules need to satisfy certain conditions in order to encourage the network partners to announce their cost-reducing ideas immediately. A suitable and simple profit-sharing rule is the combination rule which rewards the innovator and the target of cost reduction.