39 Pages Posted: 22 Mar 2009 Last revised: 20 Jul 2012
Date Written: August 30, 2011
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.
Keywords: Governance, Social Ties, Cronyism, Social Capital, Social Incentives, Delegated Monitoring, Family Firms, Organizational Culture
JEL Classification: D82, D64, G30, Z13
Suggested Citation: 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: https://ssrn.com/abstract=1364320 or http://dx.doi.org/10.2139/ssrn.1364320