@article{dc020c34e06b4a58b263793c8532cc18,
title = "Morale and Debt Dynamics",
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{\textquoteright}s financial leverage is negatively related to measures of employee morale, wages, and productivity.",
keywords = "debt, morale, productivity, relational contracts",
author = "Daniel Barron and Jin Li and Micha{\l} Zator",
note = "Funding Information: The authors are very grateful to Nicola Bianchi, Vicente Cu{\~n}at, Sebastian DiTella, Matthias Fahn, Michael Fishman, Willie Fuchs, Bob Gibbons, Hugo Hopenhayn, Niko Matouschek, David Matsa, Michael Powell, Michael Raith, and Andy Skrzypacz for their tremendously helpful comments, as well as audiences at FOM, SIOE, the 2018 Relational Contracting Workshop, and USC Marshall. The authors thank Amit Gandhi, Salvador Navarro, and David Rivers for sharing the Stata code for their productivity estimation and the staff of the FDZ and the German Employment Agency for making the data available. This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors. None of the authors have any declarations of interest. Any errors are ours. Publisher Copyright: Copyright: {\textcopyright} 2021 INFORMS",
year = "2022",
month = jun,
doi = "10.1287/mnsc.2021.4118",
language = "English (US)",
volume = "68",
pages = "4496--4516",
journal = "Management Science",
issn = "0025-1909",
publisher = "INFORMS Inst.for Operations Res.and the Management Sciences",
number = "6",
}