Group Identity and Agency Frictions: Evidence using Big Data

Abstract

Does group identity alleviate agency frictions? Using a novel Indian identity database to perceive the managers’ and board members’ identities, I provide evidence that the manager with a similar social identity as the board members relatively earns higher compensation. A firm benefits from paying the cost of in-group favoritism as the manager’s reciprocation increases the long-run value and reduces agency frictions. A 1% increase in compensation due to group identity increases firm value by 1.8%. Results are robust to alternate definitions of group identity. These findings have comprehensive implementation as it suggests that statistical discrimination can be efficient and Pareto optimal.