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Downsizing the Labor Force by Low and High Proïfit Firms - An Experimental Analysis1


  • Werner Güth

    () (Max Planck Institute of Economics, Jena)

  • Christian Paul

    () (Institut für Wirtschaftstheorie und Operations Research, University of Karlsruhe)


One may hope to capture the behavioral and emotional effects of downsizing the labor force in rather abstract settings as an ultimatum game (see Fischer et al. (2008)), or try to explore downsizing in its more natural principal-agent scenario with a labor market background. We pursue the latter approach and test experimentally whether downsizing occurs whenever (game) theoretically predicted and whether effort reactions question its proïfitability. Our main findings are that downsizing seems to happen less often than predicted and that its frequency does not depend on whether, theoretically, its gains are rather large or small. Interestingly, we also find strong evidence that piece-rate offers are used in a suboptimal way.

Suggested Citation

  • Werner Güth & Christian Paul, 2008. "Downsizing the Labor Force by Low and High Proïfit Firms - An Experimental Analysis1," Jena Economic Research Papers 2008-087, Friedrich-Schiller-University Jena.
  • Handle: RePEc:jrp:jrpwrp:2008-087

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    References listed on IDEAS

    1. Carles Boix, 1999. "Setting the rules of the game: The choice of electoral systems in advanced democracies," Economics Working Papers 367, Department of Economics and Business, Universitat Pompeu Fabra.
    2. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 179-221.
    3. Cukierman, Alex & Tommasi, Mariano, 1998. "When Does It Take a Nixon to Go to China?," American Economic Review, American Economic Association, vol. 88(1), pages 180-197, March.
    4. Acemoglu,Daron & Robinson,James A., 2009. "Economic Origins of Dictatorship and Democracy," Cambridge Books, Cambridge University Press, number 9780521671422, March.
    5. Acemoglu, Daron, 2003. "Why not a political Coase theorem? Social conflict, commitment, and politics," Journal of Comparative Economics, Elsevier, vol. 31(4), pages 620-652, December.
    6. Jeffrey Banks & John Duggan, 2006. "A Social Choice Lemma on Voting Over Lotteries with Applications to a Class of Dynamic Games," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 26(2), pages 285-304, April.
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    More about this item


    downsizing; experimental economics; principal-agent model; labor economics;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General

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