We report the first results for Japanese firms on the effects of employee stock-ownership plans (ESOP's) and bonuses by estimating production functions using new panel data. We find that the introduction of an ESOP will lead to a 4-5-percent increase in productivity; this productivity payoff takes 3-4 years. There is a modest productivity gain from the bonus system. We also find evidence that the productivity effect of bonuses is enhanced by the existence of ESOP's, suggesting that ESOP's may create a climate conducive to profit-sharing by enhancing long-term commitment and peer monitoring.

The authors report the first results for Japanese firms on the effects of employee stock-ownership plans (ESOPs) and bonuses by estimating production functions using new panel data. They find that the introduction of an ESOP will lead to a 4-5 percent increase in productivity; this productivity payoff takes three to four years. There is a modest productivity gain from the bonus system. The authors also find evidence that the productivity effect of bonuses is enhanced by the existence of ESOPs, suggesting that ESOPs may create a climate conducive to profit-sharing by enhancing long-term commitment and peer monitoring. Copyright 1995 by American Economic Association.

The authors are grateful to Avner Ben-Ner, Jacques Defourny, Saul Estrin, Felix FitzRoy, Barbara Lee, Bentley MacLeod, Egon Neuberger, Jeffrey Pliskin, Stephen C. Smith, and three anonymous referees for comments on various drafts of this paper. Jones acknowledges with gratitude thefinancial assistance of the National Science Foundation (Grant # 9010591). Of course, all remaining errors and any omissions are entirely the responsibility of the authors.