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Authority Versus Loyalty: Social Incentives and Governance

Samuel Lee

Santa Clara University - Leavey School of Business; European Corporate Governance Institute (ECGI)

Petra Persson

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

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Date posted: March 22, 2009 ; Last revised: July 20, 2012

Suggested Citation

Lee, Samuel and Persson, Petra, Authority Versus Loyalty: Social Incentives and Governance (August 30, 2011). NYU Working Paper No. FIN-10-001. Available at SSRN: http://ssrn.com/abstract=1364320 or http://dx.doi.org/10.2139/ssrn.1364320

Contact Information

Samuel Lee (Contact Author)
Santa Clara University - Leavey School of Business
500 El Camino Real
Santa Clara, CA California 95053
United States
European Corporate Governance Institute (ECGI) ( email )
B-1050 Brussels
Petra Persson
Stanford University ( email )
Stanford, CA 94305
United States
Research Institute of Industrial Economics (IFN) ( email )
Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Feedback to SSRN

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