Authority Versus Loyalty: Social Incentives and Governance

39 Pages Posted: 22 Mar 2009 Last revised: 20 Jul 2012

See all articles by Samuel Lee

Samuel Lee

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

Petra Persson

Stanford University; Research Institute of Industrial Economics (IFN)

Multiple version iconThere are 2 versions of this paper

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

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: or

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 )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm

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

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