Profit sharing (with workers) facilitates collusion (among firms)

We show how profit sharing by firms with workers facilitates collusion among firms in a dynamic oligopoly environment with uncertain demand. We first show that firm profits can always be increased by tying wages to market conditions. The optimal agreement takes the form of an option and features partial sharing because increased sharing raises the expected price-wage differential, but reduces price-wage variability. We then show that given any cartel, there exist market conditions such that simply giving some expected profit to workers raises expected firm profits via the transfer's impact on the incentive to cheat on the cartel.