Abstract

This paper studies the e¤ect of social ties on governance. Social ties are per se neutral and merely act as incentive bridges that transmit incentives across individuals. Whether this improves or undermines governance depends on what incentives are transmitted. We demonstrate this in a delegated monitoring model where the supervisor is friends with the agent and cares about social recognition. Two basic modes of governance emerge, authority and loyalty, which di¤er in whether they encourage or discourage social ties. This dichotomy reconciles opposing views on social ties and governance, and provides new perspectives on family …rms, gray directors, business networks, and organizational culture.

Citations