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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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