Friday, 5 July 2013

Why Would an Employer Give an Employee an Informal Loan? Commitment

Richard Hunt and Mat Hayward fom the University of Colorado were interested in employees who asked their employer for a loan, because they had no money but, for instance, had to buy a car, pay for their daughter’s wedding, medical bills, buy food and utilities, or faced home eviction. Therefore, they undertook to survey and interview small and medium-sized building contractors in Colorado.  No fewer than 67 percent of companies lent at least one of their employees money, with an average of about $1,100. Hunt and Hayward looked at 83 of them in more depth.

The first thing they found out was that, of the 459 loans that these 83 companies in combination handed out to one of their employees, no fewer than 57 percent were completely informal; meaning without any contract or any other formal enforcement mechanism. Why would firms do this? Even if they wanted to lend them money, why not give them a contract for the loan? This was puzzling because making it an informal, instead of formal loan with a contract, left the employer vulnerable to cheating by the employee. Because the employee simply could not pay back, or eventually even somehow inform the tax authorities (since informal loans are illegal). Why would employers voluntarily take that risk?

Hunt and Hayward theorised that employers granting the loan sometimes deliberately make themselves vulnerable towards the employee - by choosing an informal arrangement rather than a contract – to solicit trust and commitment from the employee. Granting a loan to a valuable employee in his time of need and do that in a way which explicitly makes the employer itself vulnerable could create substantial commitment and reciprocity from the employee, grateful for the loan and honoured by the trust placed upon him.

In conformity with this theoretical perspective, Hunt and Hayward found that informal loans were indeed more often extended when the employee needed the money for something personal and emotional, such as a wedding, a graduation, or to pay medical bills. When the loan concerned buying stuff (e.g. a car), paying off a credit card debt or rent, employers more often resorted to a formal contractual loan.

Moreover, Hunt and Hayward conjectured that employers would be more likely to make such an informal loan (rather than a formal, contract-based one) to employees who they were more eager to keep. And indeed they found that the informal loans were more often extended to better performing employees; those that were neither very young nor old (but just the right age to be both experienced and still have many productive years ahead of them), and at a time when the firm was most dependent on them, because it was still relatively new and small, and did not yet have a big backlog in terms of outstanding work assignments.

The question is: Did it work? Does extending an informal loan – at thus putting yourself at risk of being cheated on – result in improved (financial) performance? Hunt and Hayward showed that the answer is a resounding yes: their findings indicated that employers were better able to retain employees to whom they had extended such a loan. Furthermore, their calculations showed that it resulted in enhanced employer profit. Hence, making yourself vulnerable (by not asking for a formal contract) eventually paid off in financial terms.


 

Paper presented at the “Sumantra Ghoshal Conference for Managerially Relevant Research” at the London Business School
Our vulnerability is my gain: Linking exchange parties’ vulnerability to informal transactions and firm performance. Richard Hunt & Mathew Hayward (University of Colorado at Boulder)
Paper summary published with permission from the authors.

24 comments:

Loan4india said...

very useful blog you offering business loan program keep it... if you want know... Project loan,home loan,business loan loan against property just visit here... http://www.loan4india.com/

Ranjit Singh said...

Nice information appreciate your work
Payday Loans

Albert Luis said...

Good Article thanks for share.
Cash Advance Chicago

Nathan leo said...

I'm happy to find numerous useful info here in the post. I would really like to come back again right here for likewise good articles or blog posts. Thanks for sharing...
Sell Gift Cards

ban paul said...

Find very useful information. After read so many blogs…. Thanks
Cash For Gift Cards Seattle

Jessica Walker said...

I really appreciate the efforts you've given in writing this valuable information. Loans For Business Start Up‎ is really an important factor if you are planning to put up a business. It can help you answer your financial problem.

Justin Albert said...

Loans are necessary to meet general requirements. This is an amazing post that teaches me many things that I have never read before.
Personal Loans

Shiwani said...

Well, it’s a nice one, I have been looking for. Thanks for sharing such informative stuff.
For more details, Please visit our website @ http://www.rvwireteknologies.com/

Cash Pay said...


I read this blog really this is great post

billpayday.com

Joseph Roolins said...

Each time I used to always check blog posts within the first hours in the break of day, because I like to get information increasingly more.north carolina payd loan

Bill Salouris said...

Well, if your employee needs money they can loan to their employer. I just wish your employer is very understanding to approved your loan.

elizabeth forbes said...

Hello, Good day to everybody reading this,

My name is Elizabeth Forbes from United States. I want to thank Mr John Michaels who helped me to get a loan. For the past three months, I have been searching for a loan to settle my debts, everyone tried to dupe me of my money until I finally met Mr John. He was able to give me a loan of $10,000 USD. He can also help you. He has also helped some other colleagues of mine. If you need any financial help, kindly contact his company through email: aceloanservices@hotmail.com I believe he can help you. Contact him to get help just as he helped me. below are his words of encouragement to those seeking for a legit and honest private loan lender.

"Do you need a loan to pay off credits and debts? Do you need finance to set up your own business? Do you need loans to carry out large projects? Do you need college loan? Do you need funding for other various purpose? email: aceloanservices@hotmail.com"

Thank you for reading and good luck.

Dora Ali said...

very useful information.

Osman raheem said...

Are you looking for a Loan to enlarge your business? Do you need loan to pay off your debt and start a new life? You have come to the right place were we offer Loans at a very low interest rate of 3%. Interested people/company should please contact us via email for more details.

Application For loan
First Name:
Last Name:
Date Of Birth:
Address:
Sex:
Phone No:
City:
Zip Code:
State:
Country:
Nationality:
Occupation:
Monthly Income:
Amount Needed in currency:
Duration:
Purpose of the loan:
E-mail address:
Where did you hear about us?

Email: osmanloanserves@gmail.com

chansara said...

Love to read it,Waiting For More new Update and I Already Read your Recent Post its Great Thanks. אפשרות הלוואה לחברה

jack said...

I am very grateful to inform the general public about this kind of agency who sanction loan. When I started my business at the initial time,I urgently need a hard money loan but nobody could help me out,a close friend of mine offer me to visit TRUST LOAN FIRM.LINK to get a loan and to God be the glory I got a loan and finance the business. It's so easy to apply and their interest rate is very affordable,contact them via email: apexexpressloanoffer@gmail.com for your own loan amount.
Thanks,

High PR backlinks SEO said...

I am appreciating it very much! Looking forward to another great article.
payday loans

Kate Lisa Loans said...

Welcome To KATE LISA CREDIT SOLUTION

Email : kate_solution@hotmail.com
Mobile : +2347050251612
Contact : Mrs Kate Lisa

Do you need a loan? Are you in a financial crisis or needs money to start your own business? Do you need loan to settle your debt or pay your bills or start a nice business? You have a low credit score and you are finding it hard to obtain capital loan from local banks and other financial institutions? Here is your chance to get a loan from our Organization. We offer loans to individuals for the following purposes and much more. Personal Loan, Business Expansion, Business Start-up, Education, Debt Consolidation, Hard Money Loans. We offer loan at low interest rate of 3%. contact us today for more information on how to apply for a loan and i assure you we render 24 hours loan delivery service. Your financial breakthrough is our desire. contact us via email for more information. Email : kate_solution@hotmail.com

Devid said...

All Institute in India
Top 10 Nursing Institute in India
Ayurveda Institute in India
Top 10 MBA Institute in India
Top 10 Law Institute in India
Top 10 MCA Institute in India
Top 10 Dental Institute in India
B.Arch Institute in India
Engg Institute in India
MCA Institute in India
Top 10 Medical Institute in India

Calvin Scott Financial Loan HOME said...

Dear Loan Seekers!

Do you need easy qualifying Business or personal loans from $5,000 - $10,000,000? Bad credit or Good credit, makes no difference with us. 2% of applications are approved within 72Hours. To apply, get in touch with us via: website: http://calvinfinancialloanhomes.bravesites.com OR
Tel: (+1) 501-429-4519
Tel: (+1) 501-404-7495

Sincerely,

Thank you.

Dan said...

Hello Applicants all over the world.

My name is Fred Davidson and i give out loans at a low interest rate of 3%.

Any interested applicant should hurry in application because you might not get this opportunity in the nearest future.

We give out all types of loan and any kind of amount you might be in need of.

We are real and legit people and we can reply to your email at anytime you want us to. We work 24 hours a day and 6 days a week. Our workers are well behaved and we speak good English. We work with real loan seekers, not scams. And anybody who thinks he/she will try to bring my business down all in the name of applying for a loan and not getting back with our money will have to face judgement and a loan term prison sentence.

If you are really interested in this offer, contact us today through email so that we can start business ASAP.

Email us today at fredloanfirm2@yahoo.com for your loan transaction to get started.

We await your application.

Best Regards
Fred Davidson

Andrew Thompson said...

How I Was Rescued By A God Fearing Lender (Lexieloancompany@yahoo.com)

Hello, I am Andrew Thompson currently living in CT USA, God has bless me with two kids and a lovely Wife, I promise to share this Testimony because of God favor in my life, 2days ago I was in desperate need of money so I thought of having a loan then I ran into wrong hands who claimed to be loan lender not knowing he was a scam. he collected 1,500.00 USD from me and refuse to email me since then I was confuse, but God came to my rescue, one faithful day I went to church after the service I share idea with a friend and she introduce me to LEXIE LOAN COMPANY, she said she was given 98,000.00 USD by MR LEXIE , THE MANAGING DIRECTOR OF LEXIE LOAN COMPANY. So I collected his email Address , he told me the rules and regulation and I followed, then after processing of the Documents, he gave me my loan of 55,000.00 USD... So if you are interested in a loan you can as well contact him on this Email: lexieloancompany@yahoo.com or text +1(406) 946-0675 thanks, I am sure he will also help you.

Nancy Leonard said...


Are you a business man or woman? Are you in a financial mess or do You need funds to start your own business? Need to pay loans Their Debt or pay off your bills or start a nice business? Do you have a low credit score and you will find it hard to get Capital loan from local banks / other financial institutions? You need one Loan or funding for any reason such as:Email: ramzan_help@hotmail.com

*Personal Loans
*Commercial Loans
*Investments Loans
*Development Loans
*Consolidation Loans
*Student Loans
*Car Loans
*Mortgage Loans
*Acquisition Loans
*Construction loans

We offer loan at low interest rate of 3% and with collateral and not Collateral, we offer personal loans, debt consolidation loans, venture capital Capital, business loan, education loan, mortgage or Loans for any reason".

However, our method offers the possibility to specify the amount of the loan needed and also the duration you can afford it, gives you a real Chance get the funds you need!

Contact us via E-mail: ramzan_help@hotmail.com

Anthony Cruz Investment said...

Are you a business man or woman? Do you need funds to start up your own business? Do you need loan to settle your debt or pay off your bills or start a nice business? Do you need funds to finance your project? We Offers guaranteed loan services of any amount and to any part of the world for (Individuals, Companies, Realtor and Corporate Bodies) at our superb interest rate of 3%. For application and more information send replies to the following E-mail address: quickcashinvestment2933@gmail.com

Thanks