An experimental study into the influence of works council advice on managerial decision-making

•An important aspect of managerial decision-making is studied, namely formal employee representation through works councils.•A laboratory experiment is used to study the fundamental mechanisms of works council advice effects.•Students assume the role of works council representatives giving advice and of managers taking a price decision in a Prisoner's Dilemma game.•Receiving advice to choose low leads to a higher tendency to choose a low price.•Prosocial managers tend to choose a high price, even when advised to opt for a low price.

SummaryThis paper experimentally studies the effect of works council advice on managerial decision-making, aiming to gain more insights into the fundamental mechanisms that may underlie the impact of works council advice. We conducted laboratory experiments in which subjects played a two-player Prisoner's Dilemma price-setting game as either a manager or works council representative. Half of the managers received an advice to opt for a low or a high price; the other half received no advice. Managers receiving advice to choose a low price (play Nash) have a higher tendency to choose a low price. Subjects with an other-regarding orientation tend to choose a high price. Furthermore, we found an interaction effect of advice for other-regarding managers.