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Research Details

Productivity and Debt in Relational Contracts

Abstract

Financial obligations make it more difficult for firms to motivate their employees. Using administrative data, we document that a firm's financial leverage is negatively related to measures of employee morale, wages, and productivity. To explore these facts, we build a dynamic model of a wealth-constrained manager who simultaneously repays a creditor and motivates a worker. If the manager cannot commit to payments, then indebted managers are less willing to pay promised rewards, leading to low worker effort. In profit-maximizing equilibria, effort and wages increase as outstanding debt decreases, although even repaid debts can have lingering effects on effort.

Type

Working Paper

Author(s)

Daniel Barron, Jin Li, Michal Zator

Date Published

2020

Citations

Barron, Daniel, Jin Li, and Michal Zator. 2020. Productivity and Debt in Relational Contracts.

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