Research Details

Abstract

This paper shows that debt undermines relational incentives and harms worker morale. We build a dynamic model of a manager who uses limited financial resources to simultaneously repay a creditor and motivate a worker. If the manager can divert or misuse revenue, then debt makes the manager less willing to follow through on promised rewards, leading to low worker effort. In profit-maximizing equilibria, the firm prioritizes repaying its debts, leading to gradual increases in effort and wages. These dynamics can persist even after debts have been fully repaid. Consistent with this analysis, we document that a firm's financial leverage is negatively related to measures of employee morale, wages, and productivity.

Type

Article

Author(s)

Daniel Barron, Jin Li, Michal Zator

Date Published

2022

Citations

Barron, Daniel, Jin Li, and Michal Zator. 2022. Morale and Debt Dynamics. Management Science.(6): 4496-4516.