Pay cuts and layoffs in an experimental minimum effort coordination game

Abstract

It is well-documented that during recessions, businesses prefer to lay off workers rather than implement across the board pay cuts. We examine the impact of pay cuts versus layoffs on intra-organization coordination, which is a fundamental problem facing firms involved in team production, by looking at behavior in the minimum effort coordination game following an intervention. Our results suggest that, contrary to received wisdom, both pay cuts and layoffs foster better coordination success. In particular, we do not find that pay cuts are detrimental to intraorganization coordination.