Absenteeism, Productivity, and Relational Contracts Inside the Firm

Abstract: Relational contracts are essential building blocks of the theory of the firm. Yet empirical evidence of the properties of these contracts within firms is limited by the scarcity of records of coworker cooperation. To address this gap, we leverage a unique dataset that tracks transfers between production line managers in Indian ready-made garment factories. We study how managers cope with worker absenteeism on their teams. 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 show that managers do indeed respond to shocks by lending and borrowing workers in a manner consistent with relational contracting. But many potentially beneficial transfers are left unrealized, meaning 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 at the high observed levels of worker absenteeism, resolving as much of the worker misallocation problem as possible through these relationships can meaningfully increase productivity.