Social Connections and Incentives in the Workplace: Evidence from Personnel Data

We present evidence on the effect of social connections between workers and managers on productivity in the workplace. To evaluate whether the existence of social connections is beneficial to the firm's overall performance, we explore how the effects of social connections vary with the strength of managerial incentives and worker's ability. To do so, we combine panel data on individual worker's productivity from personnel records with a natural field experiment in which we engineered an exogenous change in managerial incentives, from fixed wages to bonuses based on the average productivity of the workers managed. We find that when managers are paid fixed wages, they favor workers to whom they are socially connected irrespective of the worker's ability, but when they are paid performance bonuses, they target their effort toward high ability workers irrespective of whether they are socially connected to them or not. Although social connections increase the performance of connected workers, we find that favoring connected workers is detrimental for the firm's overall performance.

Policy implications 
In a setting where managerial effort can be targeted to affect the productivity and earnings of individual workers, vertical social connections amongst workers can affect individual and firm performance.
Bandiera, O., Barankay, I., & Rasul, I., 2009. 'Social Connections and Incentives in the Workplace: Evidence From Personnel Data'. Econometrica, vol. 77, pages 1047–1094.