Fire Some Rather Than Cut Wages for All


Fire Some Rather Than Cut Wages for All[2]

Imagine that your firm faces a budget shortfall and absent salary reductions you soon won’t have the funds to meet your payroll obligations. You have two choices: Give everyone a 10 percent wage cut or fire 10 percent of your workers. Adverse selection shows why you should prefer the firing option.

If you give everyone a 10 percent wage cut, some of your workers will probably leave for better-paying jobs. Unfortunately, your most productive workers will probably have the best job opportunities and will consequently be the most likely to quit. Cutting everyone’s wages by 10 percent will cause adverse selection to come into play, since those whom you would most want to stay will be the ones most likely to leave. In contrast, if you fire 10 percent of your employees, you could obviously eliminate your least-productive workers.

[2]This example is taken from Milgrom (1992), 154.




Game Theory at Work(c) How to Use Game Theory to Outthink and Outmaneuver Your Competition
Game Theory at Work(c) How to Use Game Theory to Outthink and Outmaneuver Your Competition
ISBN: N/A
EAN: N/A
Year: 2005
Pages: 260

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