Social and Economic Networks in Corporate Culture
Abstract
We use psychological game theory, cognitive dissonance, and network analysis to investigate how economic connections within firms and social connections outside of firms play a role in determining corporate culture. We demonstrate how employees’ social interactions and work interactions create networks in which their behavior can influence the behavior of others. Agents can play cooperatively or non-cooperatively in social and work networks, with equilibrium behavior in each network influenced by the behavior of others in the network. We show how non-cooperative behavior in psychological games played in social networks can be contagious, with otherwise cooperative players shifting to playing non-cooperatively. Because these players are also part of employee networks, contagion of “bad” behavior in social networks can spread to employee networks within firms and across firms. The main lesson of our analysis is that a firm’s culture does not exist in isolation from the culture of the society in which the firm is embedded. Contagion of non-cooperative behavior can begin far away from the network of the firm’s employees and eventually invade the firm. This invasion is less likely, the culture of the firm is more resilient, if the social density of its set of workers is large or if the critical value for invasion is low. If this gap is large, the firm’s culture can withstand shocks to either the social density of its workers or to the payoffs to cooperative behavior; but if it is small, even a slight perturbation in the network can cause a collapse in the firm’s culture.