Testing the Goodwin Model: Can Distribution Battles Trigger Business Cycles? Evidence from a Behavioral Experiment

Abstract The Goodwin model provides an important explanation for business cycles with its investment decisions based on pro-cyclical wage fluctuations. The purpose of this paper is to test the central hypothesis of the Goodwin model, namely that wage developments influence investments, which creates business cycles. The model used to test this hypothesis was that of a simplified company, where labor demand is related to investments. Thus, more investments lead to higher wages and vice versa. In the behavioral experiment the test subjects played the manager of a company who maximizes their profits through investments. The central assumptions and conclusions of the Goodwin model are supported by behavioral science.