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Absenteeism, Productivity, and Relational Contracts Inside the Firm

FOCUS AREA

Improving Work Environment

LOCATION

Karnataka

REACH

xx

PARTNERS

Boston College, Harvard Business School, University of Michigan

STAGE

DESIGN

EVALUATE

ANALYZE

DISSEMINATE

SCALE-UP

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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.

Challenge

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.

Design

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.

Findings

  • We first document that worker absenteeism shocks are frequent, often large, weakly correlated across managers, and have substantial negative impacts on team productivity. There are thus gains from sharing workers. We find that the number of workers borrowed by a manager increases with the level of absenteeism on their team.
  • We show that managers do indeed respond to shocks by lending and borrowing workers in a manner consistent with relational contracting.
  • Better outside options, demographic differences and age of relationship affect borrowing.
  • But many potentially beneficial transfers are left unrealized. This means that while relational contracts mitigate some of the adverse impacts of shocks, risk is still imperfectly shared across managers. This is because managers’ primary relationships are with a very small subset of potential partners, who tend to be demographically similar and work on spatially contiguous lines.
  • Counterfactual simulations show that there is potential for large gains to the firm from reducing the barriers to forming additional relationships among managers.

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