Corporate Downsizing to Rebuild Team Spirit

In this working paper, we propose a new theory fordownsizing, based on strategic reasons rather than technological ones. A crisis may lead to a decrease in the willingness to cooperate in an organization, and therefore to a bad equilibrium.

A consensual downsizing episode may signal credibly that survivors are willing to cooperate, and thus, it maybe optimal and efficiency-enhancing (for the individuals remaining in the organization), as the empirical evidence suggests. A variation of the same mechanism leads to efficient upsizing.