The Value of Professional Ties in B2B Markets

We study how a particular form of social ties (i.e., professional ties proxied by past employment) affects price and profitability in business-to-business (B2B) markets. Although most of the work on social ties focuses on information diffusion in business-to-consumer markets, we ask the following. Do B2B buyers receive higher or lower prices from sellers with whom they have professional ties? Can professional ties benefit both buyers and sellers and create win-win exchanges? Answering these questions is challenging because it is difficult to observe B2B prices, the individual decision makers (IDMs), and elements of differentiation that drive price variation. Moreover, potentially endogenous formation of social ties exacerbates the identification challenge. We resolve these challenges by leveraging proprietary data from the Federal Reserve on the repo market, the largest market for short-term loans with daily transactions of more than $2 trillion. In addition, we use financial disclosure laws to unmask IDMs at sellers and use LinkedIn to reveal their ties. We leverage exogenous movement of IDMs in and out of decision-making positions to identify the effect of professional ties on price. We show that a seller IDM, who is the buyer’s former employee, charges the buyer 1/4 basis points more than other buyers with no ties (i.e., 25 basis points relative to median price, or 13% of average cross-sectional price variance). The mechanism driving this price increase is “supply reliability.” Sellers with a professional tie to the buyer act more reliably toward that buyer during supply-demand imbalances. We perform several robustness checks, including leveraging the Federal Reserve’s monetary policy actions in response to the COVID-19 pandemic, to show that an exogenous increase in the aggregate cash supply diminishes the effect of professional ties, consistent with a supply reliability mechanism. Our work suggests professional ties can affect B2B prices beyond observable supply-demand dynamics and provide value for sellers and buyers.