In standard discussions (capitalistic economy), business firms and the income‐distribution property of production factors are dealt with in a manner in which they are independent from each other and there is no interaction as such between them. Furthermore, no role whatso‐ever is assumed for externalities. If we accept that there is interaction between production factors and these factors because of the existence of externalities affects each other, therefore it is only natural to come to this conclusion that both the definition of business firm and the share of production factors should be changed. The proposal developed in this paper is based on this very important consideration. The profit share of Mudareb (profit‐sharing agent) has been used in this paper to cover more general issues, such as labor's income share in an Islamic system. The Mudareb's relative share might be justified on the grounds that he has the appropriate expertise, profession, so to speak. This justification can be extended to “labor” in general, be it in industry, services, and other economic activities. It seems that, it is not only the degree of expertise and skill which determines the labor's share, but also its interaction with other expertises which makes one qualified to share part of the profit. This interaction provides better results than the same of individual skills. The application of the proposal not only increases output and hence the total revenue of a firm, but also helps keep the production cost at its lowest possible level. Furthermore, it leads one to look at a firm as an interacting body of different expertise. Increase in efficiency together with low production costs are to the mutual benefits of both the workers and the firm. Furthermore, there would not only be zero monitoring cost, but also eliminates shirking while increasing the effort of the workers to its maximum level.
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