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Authority Versus Loyalty: Social Incentives and GovernanceSamuel LeeNew York University (NYU) - Leonard N. Stern School of Business; European Corporate Governance Institute (ECGI) Petra PerssonColumbia University; Research Institute of Industrial Economics (IFN) August 30, 2011 NYU Working Paper No. FIN-10-001 Abstract: 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 working papers seriesDate posted: March 22, 2009 ; Last revised: July 20, 2012Suggested CitationContact Information
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