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

Leif Brandes, Marc Brechot and Egon Franck

No 159, Working Papers from University of Zurich, Institute for Strategy and Business Economics (ISU)

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.

Keywords: Social Networks; Social Capital; Principal-Agent-Relationship; Worker Allocation; Basketball (search for similar items in EconPapers)
Pages: 40
Date: 2011, Revised 2012
New Economics Papers: this item is included in nep-bec, nep-cta, nep-hrm, nep-net, nep-soc and nep-ure
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http://repec.business.uzh.ch/RePEc/iso/ISU_WPS/159_ISU_full.pdf Revised version, 2012 (application/pdf)

Related works:
Working Paper: Managers’ External Social Ties at Work: Blessing or Curse for the Firm? (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:iso:wpaper:0159

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