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

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.