Discontinuities in the Value of Relational Capital: The Effects on Employee Entrepreneurship and Mobility

Abstract

We examine how a discontinuous increase in the value of an employee’s relational capital influences the employee’s mobility and entrepreneurship decisions in professional and business service contexts. Drawing on the unfolding model of voluntary turnover, we develop a theory proposing that positive shocks to external relational capital will catalyze employees to consider alternative employment options, thereby increasing the probability of exit. We further maintain that exit decisions in response to such shocks will be driven by a desire to appropriate more value, making these shocks strong predictors of employee entrepreneurship, especially when the employee works in an area that is peripheral to the firm’s core capabilities. Empirically, we construct a unique employee-employer linked database that tracks employment of lobbyists in the United States federal lobbying industry. Leveraging plausibly exogenous shocks to the value of an employee’s relational capital and a novel market-based measure of the employee’s position in the firm’s knowledge space, we report two sets of findings. First, an increase in the value of relational capital has a positive effect on the likelihood of mobility to established firms and employee entrepreneurship, with the effect for the latter stronger than the former. Second, the magnitude of the effect on employee entrepreneurship becomes stronger when the employee is peripheral to the firm’s core knowledge. Together, our results are consistent with a value creation-value appropriation rationale, where sudden increases in the value of an employee’s relational capital drive exit as a means to appropriate a greater portion of value created.