Generalized Exchange and Economic Performance: Social Embeddedness of Labor Contracts in a Corporate Law Partnership

Abstract

This chapter examines the relationship between social structure and economic performance at the intraorganizational level. It attempts to identify a few conditions under which individual social relationships are most productive for the firm in collegial organizations—where the production process is difficult to routinize, where professional expertise and advice cannot easily be standardized, and therefore where internal transaction costs for the firm as a whole can be assumed to be a large part of total costs. An empirical study of a medium-sized northeastern U.S. corporate law firm is used for that purpose. In this firm, attorneys are shown to be bound by a labor contract that is difficult to sustain on pure economic terms: partners can easily free-ride, and associates can threaten the quality of work. Against this damage potential, a social system sustains their commitment. Using network data collected in the firm, social capital is described and measured at the individual, workgroup, and structural levels to show that the more constraining the member’s coworkers network, the easier it is for the firm to extract higher economic performance, including from tenured partners, by controlling the time put into work. With regard to partners, such teams represent an element of self-entrapment compensated by status and professional recognition. Examples of low and high economic performers, and their respective combinations of social resources, are provided as illustrations. A locally multiplex generalized exchange system is then described as providing firmlevel social capital. Its existence is viewed as a precondition for individual-level and group-level social structure to be productive because it maintains the circulation of social resources in the firm. A multilevel form of embeddedness is thus revealed here and shows the importance of taking into account a meso level when measuring the relationship between social capital and performance. In this particular case, the notion of multilevel embeddedness advances our understanding of economic performance: the latter is rooted in individual social capital, that is itself rooted in workgroup and firm social capital, which in turn helps individual members in being more productive. Finally, however, this virtuous circle is shown to be fragile. First, because group-level social capital also threatens the cohesiveness of the firm: well-knitted teams can defect and take away with them valued members and clients. Second, given the dependence of economic performance on firm social capital, the relative contribution of individual ties and collective social structure to economic performance is also a highly politicized issue.