TITLE:
Owner-Employee Compensation Game
AUTHORS:
Robert A. Agnew
KEYWORDS:
Compensation, Cooperative Game Theory, Shapley Value
JOURNAL NAME:
Theoretical Economics Letters,
Vol.13 No.6,
December
27,
2023
ABSTRACT: A firm typically consists of an owner and capital provider plus key
employees who together can create surplus
value above individual outside opportunities. Our research approach is to model
the firm as a cooperative game across these individual players with specific
attention to the core and Shapley value. In our model, Shapley value splits
surplus value 50 - 50 between the owner and the group of key employees.
This seems intuitively fair but it is not dominant over other allocations in
the core, particularly all surplus to the owner and all surplus to the
employees. This is a recurring theme in cooperative
game theory: Shapley value is a standard of distribution fairness but it is
usually not uniquely dominant over other core solutions.