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Research Details

Productivity and Debt in Relational Contracts

Abstract

This paper studies how financial obligations constrain incentives, which generates productivity dynamics. A liquidity-constrained manager simultaneously repays a creditor and motivates a worker. If the manager cannot commit to output-contingent payments, then effort increases as the manager repays debts in a profit-maximizing equilibrium. The manager might defer worker compensation while repaying the creditor, in which case effort depends on both current and past debts. If the manager and worker can collude, which the creditor deters by threatening liquidation, then debt again has a lingering effect on the relational contract. Empirically, current and past debt increases are correlated with productivity decreases.

Type

Working Paper

Author(s)

Daniel Barron, Jin Li

Date Published

2018

Citations

Barron, Daniel, and Jin Li. 2018. Productivity and Debt in Relational Contracts.

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