Employees' Prior Affiliations Constrain Organizational Network Change: Evidence from U.S. Venture Capital and Private Equity

Abstract

I theorize that in order to alleviate information asymmetries organizations embed both employment relationships and inter-organizational relationships in their employees’ prior education and employment affiliations. Analyses of employment and investment data from U.S. venture capital and private equity firms support the theory. First, increasing educational prestige differentials decrease both inter-individual co-employment rates and inter-organizational co-investment rates. Second, two individuals who share a prior education or a prior employment affiliation are more likely to be employed by the same organization than are two individuals who do not share such an affiliation. Third, the likelihood of two organizations forming a co-investment relationship increases with the number of prior education or employment affiliations shared by their employees. I propose that these tendencies constrain inter-organizational network change by stabilizing advantaged organizations’ positions and limiting disadvantaged organizations’ positional mobility. Implications for studies of network evolution and socioeconomic inequality are discussed.

Keywords: networks, education, employment, inter-organizational relationships, hiring

JEL Classification: D21, D23, M51