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1 J. Mgmt. & Sustainability 2 (2011)

handle is hein.journals/jms1 and id is 1 raw text is: Downsizing the Labor Force by Low and High Profit Firms - An Experimental Analysis Werner Giith (Corresponding author) Max Planck Institute of Economics 10 Kahlaische Street, D-07745 Jena, Germany E-mail: gueth ttecon.mpg.de Christian Paul Institute of Economic Theory and Statistics (ETS) Karlsruhe Institute of Technology (KIT), Germany E-mail: paul-christian ttglx.de Received: April 5, 2011 Accepted: May 20, 2011 doi:10.5539/jms.vlnlp2 The authors gratefully acknowledge financial support from the German Research Foundation (DFG), research program: Flexibility in Heterogenous Labor Markets. Furthermore, we have benefitedfrom helpful comments by Marion Ott, Karl-Martin Ehrhart, and Ralf Loschel. Abstract We theoretically and experimentally employ a principal-agent setting to capture the effects of downsizing the labor force. One of the two main treatments features a large increase of the principal's profit and another one a rather low increase. Our main experimental findings are that downsizing often is avoided and that its frequency does not depend on its profitability. There is evidence that agents spend more effort when downsizing is more profitable what might explain that downsizing frequencies hardly depend on the profitability. Keywords: Downsizing, Experimental economics, Principal-agent model, Labor economics 1. Introduction Downsizing is often understood as laying off a large group of workers and has become a synonym for, allegedly unfair, firing decisions in popular (science) literature. More broadly, downsizing could refer to all situations where a subgroup of interacting parties within an organization would have better success or survival prospects than the whole group. Dramatic examples of lifeboats with too little water or food for all can be found in novels and are hopefully more often fictional than factual. One reaction to such challenges could be volunteers offering to be excluded. But such hero volunteers are probably a rare species. What one realistically has to expect are attempts of some parties to exclude others against their will. This does not only invoke material aspects but also raises moral and emotional concerns not only of those who suffer, e.g., by being excluded, but also of those who exclude others. There is no hope to capture such dramatic circumstances in the lab without violating ethical constraints. But downsizing is not restricted to such dramatic events. People may exclude others from social activities because interaction in smaller group is more fun or more efficient. When going by car to attend an event it may be, for instance, more enjoyable to go with just one or two other friends than to have one's car packed to the limit. This illustrates that downsizing may invoke minor or major effects for those who are dismissed as well as for those who stay on. Although, of course, the exact size of these effects will matter, the qualitative effects are interesting as well. This, in our view, justifies an experimental approach to explore downsizing; not to substitute field research but to complement it. One can hope to capture crucial aspects of firms' downsizing decisions by employing rather abstract scenarios like ultimatum games, e.g., with one proposer and several responders of whom some can be excluded (Fischer, ISSN 1925-4725 E-ISSN 1925-4733 www.ccsenet.org/_ms Journal of Management and Sustainability Vol. 1, No. 1; September 20 11

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