Lay-offs and Productivity at a Bangladeshi Sweater Factory

Robert Akerlof (University of Warwick)
Anik Ashraf (LMU Munich)
Rocco Macchiavello (LSE)
Atonu Rabbani (University of Dhaka)
Christopher Woodruff (University of Oxford)

Abstract : In this paper, we try to understand how firing of workers in an organization affect the productivity of the surviving co-workers. We take advantage of detailed individual-level production records from, and extensive fieldwork conducted at, a large Bangladeshi sweater factory before, during and after several episodes of labour unrests that eventually led the management to fire numerous workers (approximately 25% of the labour force in the relevant production floor). Exploiting across-worker variation in exposure to co-workers firing, we document a negative impact of firing on productivity of surviving workers. Additional evidence rules out a number of competing mechanisms such as subsequent targeted punishments from management, loss of productive peers, or attention diverted to help recently hired and inexperienced co-workers. We argue that the effects are likely driven by feeling of loss, or anger towards the management and by a less enjoyable workplace.

Clarity in Relational Contracts: Rules Vs. Principles

Robert Gibbons (MIT)
Manuel Grieder (ETH Zurich)
Holger Herz (University of Fribourg)
Christian Zehnder (University of Lausanne)

Abstract : Recent work in organizational economics stresses the importance of clarity in relational contracts as a reason behind the persistent performance differences that we observe between seemingly similar enterprises. Even though the conditions necessary to establish cooperation through relational contracts are straightforward in theory, in practice establishing a relational contract poses a number of difficult challenges. Specifically, trading parties face the clarity problem: they need to establish mutual understanding about the content of the relational contract and they need to succeed in adapting this mutual understanding to new situations when the environment changes. We hypothesize that building the relational contract on general principles, rather than relying on specific but narrow rules, helps achieve clarity and improves performance in repeated games with uncertainty about the future, and report results from an experiment assessing this hypothesis.

Weak Institutions and Relational Taxation in the Oil and Gas Industry

Radoslaw Stefanski (University of St. Andrews and OxCarre)
Gerhard Toews (New Economic School and OxCarre)
Marta Troya Martinez (New Economic School and CEPR)

Abstract : International contracts are difficult to enforce, especially in countries with weak institutions. Hence, oil rich countries can hold up international oil firms by renegotiating taxation once the investment is sunk. If future gains from trade exist, countries can devise a self-enforcing agreement that is "back-loaded" (Thomas and Worrall (1994)). When the country's credibility is low, delaying investment and tax collection enhances the country's credibility. On the other hand, a high credibility country's do not need to back-load the contract. The latter provides a natural empirical counterfactual. Moreover, for the agreement to be enforceable, countries with weaker institutions should receive a higher share of the available rents, especially, in periods of higher uncertainty. Using a novel data set of oil and gas contracts in many heterogeneous countries - more and less credible, we find evidence in line with the theory.