Social Network Effects on Performance and Layoffs: Evidence from the Adoption of a Social Networking Tool

By studying the changes in employees’ networks and performance before and after the introduction of a social networking tool, I find that a structurally diverse network (low in cohesion and rich in structural holes) has a positive effect on work performance. The size of the effect is smaller than traditional estimates, suggesting that omitted individual characteristics may bias the estimated network effect. I consider two intermediate mechanisms by which a structurally diverse network is theorized to improve work performance: information diversity (instrumental) and social communication (expressive) and quantify their effects on two types of work outcomes: billable revenue and layoffs. Analysis shows that the information diversity derived from a structurally diverse network is more correlated with generating billable revenue than is social communication. However, the opposite is true for layoffs. Friendship, as approximated by social communications, is more correlated with reduced layoff risks than is information diversity. Field interviews suggest that friends can serve as advocates in critical situations, ensuring that favorable information is distributed to decision makers. This, in turn, suggests that having a structurally diverse network can drive both work performance and job security, but that there is a tradeoff between either mobilizing friendship or gathering diverse information. Furthermore, it is important to examine the mechanisms by which social communications reduce the risks of being laid off. If social communications promote team effectiveness, delegating decisions rights to managers is optimal. However, if managers choose to optimize their own power at the expense of the firm, the positive impact of social communications on layoffs is evidence that delegating layoff decisions to managers can incur important costs.