Social Relations and Cooperation in Organizations

Abstract

The paper addresses the effects of social relations on cooperation (or collusion) in organizations and communities. and production relations are modeled as separate repeated strategic interactions. Linking them--by employing members of the same community or by encouraging social interaction between employees--is shown to facilitate cooperation in production: (a) because of available Social Capital, the slack of net expected gains from cooperation in the social relations which can be credibly transferred to discipline behavior in the workplace; (b) because payoffs from the social and production relations tend to be substitutes, in which case the linkage of more relations endogenously generates (a sort of increasing returns in cooperation); (c) because the linkage generates transfers of trust, reputation spillovers from a cooperative social background to newly started production relations; and (d) because agents who share social relations have access to additional information about each other's situations. The model provides a microfoundation for Putnam's concept of Social Capital and for Granovetter's idea of embeddedness for the employment relation. It shows that Kandel and Lazear's peer pressures are a credible effort-enforcing mechanism even when teams' members are fully self-interested, and that the threat of social sanctions can credibly enforce social norms independent of agents' moral constraints (that is, no second-order free rider problem exists). It provides an explanation for Japanese firms' investments in employees' free-time activities, for the Grameen Bank's requirement that group members belong to the same village and participate in social activities, for the ambiguous empirical results on the effectiveness of group-incentives, for markets' tendency to crowd out cooperative institutions, and for the sudden breakdown in trust and cooperation observed in communities after a war ends and peace is established.