Social Relations and Cooperation in Organizations

Abstract:     
The paper characterizes the effects of social relations on agents' ability to sustain cooperation (or collusion) within organizations' teams or communities. We model social and production relations as separate repeated strategic interactions. "Linking" them, for example by employing members of the same community, or by encouraging social interaction between employees, turns out to facilitate cooperation in the workplace for the following reasons: (i) there may be available "Social Capital," a slack of net expected gains from cooperation in the social relations that can be used to discipline cooperation in production; (ii) payoffs from the social and production relations are typically substitutes, so that the linkage endogenously generates new Social Capital (a sort of "economies of scope in cooperation"); (iii) the linkage allows for transfers of "trust" between the relations, that is reputation spillovers from a cooperative social background to production relations; and (iv) agents who share their social background have access to relevant information about each other's situations. The model provides a microfoundation for Putnam's concept of "Social Capital" and for Granovetter's idea of "embeddedness" for the employment relation. It shows that Kandel and Lazear's peer pressures are a credible effort-enforcing mechanism even when teams' members are fully self-interested, and that the threat of social sanctions can credibly enforce social norms independent of agents' moral constraints (that is, no "second-order free rider problem" exists). It provides an explanation for Japanese firms' investments in employees' free-time activities, for the Grameen Bank's requirement that group members belong to the same village and participate in social activities, for the ambiguous empirical results on the effectiveness of group-incentives, for markets' tendency to crowd out cooperative institutions, and for the sudden breakdown in trust and cooperation observed in communities after a war ends and peace is established.

JEL Classification: D20, J50, L23, M12, O17, Q20

Accepted Paper Series