Morale and Debt Dynamics

Daniel Barron*, Jin Li, Michał Zator

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)4496-4516
Number of pages21
JournalManagement Science
Volume68
Issue number6
DOIs
StatePublished - Jun 2022

Keywords

  • debt
  • morale
  • productivity
  • relational contracts

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research

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