EXERCISE 6.6 LAZEAR'S RESULTS

Use the best response diagram to sketch the results found by Lazear and co-authors in their study of a firm during the global financial crisis.

Draw a best response curve for each of the following years and explain what it illustrates:

1. the pre-crisis period (2006)
2. the crisis years (2007-8)
3. the post-crisis year (2009)

Is there a reason why a firm might not cut wages during a recession? Think about the research of Truman Bewley and the experimental evidence about reciprocity in Unit 4.