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The Temptation of Social Ties: When Interpersonal Network Transactions Hurt Firm Performance

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Author Info

  • Leif Brandes

    ()
    (Department of Business Administration, University of Zurich)

  • Marc Brechot

    ()
    (Department of Business Administration, University of Zurich)

  • Egon Franck

    ()
    (Department of Business Administration, University of Zurich)

Abstract

We introduce agency concerns to social capital theory and predict that managers can use individual social capital to reduce personal effort costs, which is not in the best interest of the firm. To test this prediction, we collect data on all 8,019 hiring decisions from general managers in the National Basketball Association between 1981 and 2011. We find that managers have a clear preference for hiring players through social ties. The probability that a manager hires players from an NBA franchise to which he is socially tied is 27.6% higher than for an untied franchise. To isolate the motivation for this behavior, we complement our data with information on the sporting performance of teams. In line with agency theory, we find that the hiring of players through social ties reduces team performance. The effect is large: on average, each social-tie player reduces team winning percentage by 5.4%. Overall, this paper documents first empirical evidence that decision makers’ use of individual social capital can lead to reduced firm-level performance.

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File URL: http://repec.business.uzh.ch/RePEc/iso/ISU_WPS/159_ISU_full.pdf
File Function: Revised version, 2012
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Bibliographic Info

Paper provided by University of Zurich, Institute for Strategy and Business Economics (ISU) in its series Working Papers with number 00159.

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Length: 40
Date of creation: 2011
Date of revision: 2012
Handle: RePEc:iso:wpaper:0159

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Related research

Keywords: Social Networks; Social Capital; Principal-Agent-Relationship; Worker Allocation; Basketball;

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References

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  1. Kanazawa, Satoshi & Savage, Joanne, 2009. "An evolutionary psychological perspective on social capital," Journal of Economic Psychology, Elsevier, vol. 30(6), pages 873-883, December.
  2. Sherwin Rosen & Allen Sanderson, 2000. "Labor Markets in Professional Sports," NBER Working Papers 7573, National Bureau of Economic Research, Inc.
  3. Simmons, Rob & Berri, David J., 2011. "Mixing the princes and the paupers: Pay and performance in the National Basketball Association," Labour Economics, Elsevier, vol. 18(3), pages 381-388, June.
  4. Stefan Szymanski, 2000. "A Market Test for Discrimination in the English Professional Soccer Leagues," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 590-603, June.
  5. Mas, Alexandre & Moretti, Enrico, 2006. "Peers at Work," IZA Discussion Papers 2292, Institute for the Study of Labor (IZA).
  6. Mark Granovetter, 2005. "The Impact of Social Structure on Economic Outcomes," Journal of Economic Perspectives, American Economic Association, vol. 19(1), pages 33-50, Winter.
  7. Yannis M. Ioannides & Adriaan R. Soetevent, 2006. "Wages and Employment in a Random Social Network with Arbitrary Degree Distribution," American Economic Review, American Economic Association, vol. 96(2), pages 270-274, May.
  8. Calvo-Armengol, Antoni & Jackson, Matthew O., 2007. "Networks in labor markets: Wage and employment dynamics and inequality," Journal of Economic Theory, Elsevier, vol. 132(1), pages 27-46, January.
  9. Lauren Cohen & Andrea Frazzini & Christopher Malloy, 2007. "The Small World of Investing: Board Connections and Mutual Fund Returns," NBER Working Papers 13121, National Bureau of Economic Research, Inc.
  10. David J. Berri & Stacey L. Brook & Martin B. Schmidt, 2007. "Does One Simply Need to Score to Score?," International Journal of Sport Finance, Fitness Information Technology, vol. 2(4), pages 190-205, November.
  11. Yannis M. Ioannides & Linda Datcher Loury, 2002. "Job Information Networks, Neighborhood Effects and Inequality," Discussion Papers Series, Department of Economics, Tufts University 0217, Department of Economics, Tufts University.
  12. Mark Gius & Donn Johnson, 1998. "An empirical investigation of wage discrimination in professional basketball," Applied Economics Letters, Taylor & Francis Journals, vol. 5(11), pages 703-705.
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