Relational contracts – informal agreements based on trust, with implicit terms that overcome enforcement problems – are essential building blocks of the theory of the firm. Workplace collaboration among teams and across bosses and subordinates is the result of many non-contractible transactions that are disciplined by the promise of future rents or reciprocation.
Despite the fundamental importance of relational contracts, most of what we know about the form and function of such contracts within the firm is anecdotal and limited by the scarcity of records of coworker cooperation.
We focus on one key challenge managers face in this setting – high and often unpredictable worker absenteeism. We leverage data on production team composition and output from one of the largest employers in Indian ready-made garment factories. We study how managers cope with worker absenteeism on their teams.
Even with the high levels of worker absenteeism observed, resolving as much of the worker misallocation problem as possible through these relationships can meaningfully increase productivity and profit for the firm.
Image credits: Nayantara Parikh