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

We present evidence on the effect of social connections between workers and managerson productivity in the workplace. To evaluate whether the existence of social connections isbeneficial to the firm’s overall performance, we explore how the effects of social connectionsvary with the strength of managerial incentives and worker’s ability. To do so, we combinepanel data on individual worker’s productivity from personnel records with a natural fieldexperiment in which we engineered an exogenous change in managerial incentives, from fixedwages, to bonuses based on the average productivity of the workers managed. We find thatwhen managers are paid fixed wages, they favor workers to whom they are socially connectedirrespective of the worker’s ability, but when they are paid performance bonuses, they targettheir effort towards high ability workers irrespective of whether they are socially connectedto 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.[...]