Authority Versus Loyalty: Social Incentives and Governance
Santa Clara University - Leavey School of Business; European Corporate Governance Institute (ECGI)
Stanford University; Research Institute of Industrial Economics (IFN)
August 30, 2011
NYU Working Paper No. FIN-10-001
The role of social ties in governance is controversial. We theorize that this ambivalence is natural: Social ties transmit incentives between individuals, so how they affect governance hinges on the specific incentives transmitted. We show this in a principal-supervisor-agent model where the supervisor is friends with the agent and cherishes social recognition. Two modes of governance emerge that differ in whether the principal opposes or endorses the subordinates' friendship: one based on conflict and authority, the other on trust and loyalty. For empirics, this theory implies that, to sensibly evaluate their impact, social ties must be interacted with individual incentives.
Number of Pages in PDF File: 39
Keywords: Governance, Social Ties, Cronyism, Social Capital, Social Incentives, Delegated Monitoring, Family Firms, Organizational Culture
JEL Classification: D82, D64, G30, Z13
Date posted: March 22, 2009 ; Last revised: July 20, 2012
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