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Morale and Debt Dynamics

Author

Listed:
  • Daniel Barron

    (Kellogg School of Management, Northwestern University, Evanston, Illinois 60208)

  • Jin Li

    (Faculty of Business and Economics, The University of Hong Kong, Pok Fu Lam, Hong Kong)

  • Michał Zator

    (Mendoza College of Business, University of Notre Dame, Notre Dame, Indiana 46556)

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.

Suggested Citation

  • Daniel Barron & Jin Li & Michał Zator, 2022. "Morale and Debt Dynamics," Management Science, INFORMS, vol. 68(6), pages 4496-4516, June.
    • Handle: RePEc:inm:ormnsc:v:68:y:2022:i:6:p:4496-4516
    DOI: 10.1287/mnsc.2021.4118
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    References listed on IDEAS

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    1. Fahn, Matthias & MacLeod, W. Bentley & Muehlheusser, Gerd, 2023. "Past and Future Developments in the Economics of Relational Contracts," IZA Discussion Papers 16427, Institute of Labor Economics (IZA).

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