Family Labor, Enforcement, and Product Quality: Evidence from the Lao textile industry

In developing economies where business owners suffer from agency problems with workers, kinship may serve as an enforcement device for producing high-quality products. Using unique data collected from handwoven textile micro-enterprises in Lao PDR, we examine the effect of family workforce size-the number of the owner's relatives who can work for the business-on business performance. For identification, we exploit an exogenous variation in the gender composition of the owner's relatives, which determines family workforce size. We confirm that a larger family workforce significantly increases the share of family workers in the business, positively affecting labor productivity and value-added per product. As a potential channel, having a larger family workforce seems to enable owners to produce high-price products that they design by themselves rather than low-price products with standard designs, owing to strong trust between family workers and owners. This supports the hypothesis that working with family labor helps owners overcome design infringements. We also obtained suggestive experimental evidence that owners who design products by themselves have a lower labor demand for external workers.