Microdata Evidence on Rent-Sharing

Reprint No. 2009:31

Author(s): Mahmood Arai and Fredrik HeymanYear: 2009 Title: Applied Economics Volume (No.): 41 (23) Pages: 2965–2976
Online article (restrictions may apply)

We examine the effect of firm profits on wages for individual workers while focusing on the empirical complications associated with estimating the extent of rent-sharing. Controlling for worker and firm fixed-effects and using several instruments to deal with the endogeneity of profits, we report results indicating that Ordinary Least Square (OLS)-estimates strongly underestimate the effects of profits on wages. Moreover, the effect of profits on wages are estimated separately for firms with increasing and decreasing profits within a given time period. We find a positive and stable effect only in firms with increasing profits. This is in line with the idea that falling profits do not lead to wage cuts while increasing profits imply higher wages.

Arai, Mahmood and Fredrik Heyman (2009), "Microdata Evidence on Rent-Sharing". Applied Economics 41(23), 2965–2976.

Fredrik Heyman


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