Downsizing the Labor Force by Low and High Profit Firms– An Experimental Analysis

One may hope to capture the behavioral and emotional eects of downsizingthe labor force in rather abstract settings as an ultimatum game (see Fischeret al. (2008)), or try to explore downsizing in its more natural principalagentscenario with a labor market background. We pursue the latter approachand test experimentally whether downsizing occurs whenever (game)theoretically predicted and whether eort reactions question its protability.Our main ndings are that downsizing seems to happen less often than predictedand that its frequency does not depend on whether, theoretically, itsgains are rather large or small. Interestingly, we also nd strong evidencethat piece-rate oers are used in a suboptimal way.