Social Relations and Cooperation in Organizations

29 Pages Posted: 3 Feb 1999

See all articles by Giancarlo Spagnolo

Giancarlo Spagnolo

Stockholm School of Economics (SITE); Centre for Economic Policy Research (CEPR); University of Rome 'Tor Vergata'; EIEF

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The paper addresses the effects of social relations on cooperation (or collusion) in organizations and communities. Social and production relations are modeled as separate repeated strategic interactions. "Linking" them--by employing members of the same community or by encouraging social interaction between employees--is shown to facilitate cooperation in production: (a) because of available "Social Capital," the slack of net expected gains from cooperation in the social relations which can be credibly transferred to discipline behavior in the workplace; (b) because payoffs from the social and production relations tend to be substitutes, in which case the linkage of more relations endogenously generates Social Capital (a sort of "increasing returns in cooperation"); (c) because the linkage generates transfers of "trust," reputation spillovers from a cooperative social background to newly started production relations; and (d) because agents who share social relations have access to additional 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

Suggested Citation

Spagnolo, Giancarlo, Social Relations and Cooperation in Organizations. Available at SSRN: or

Giancarlo Spagnolo (Contact Author)

Stockholm School of Economics (SITE) ( email )

P.O. Box 6501

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Centre for Economic Policy Research (CEPR)

United Kingdom

University of Rome 'Tor Vergata' ( email )

Faculty of Economics - DEI
Via Columbia 2
Rome, RM 00133

EIEF ( email )

Via Due Macelli, 73
Rome, 00187


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