When in Rome: Local social norms and income differences

Abstract

We investigate whether social capital influences tournament incentives and income differences between the chief executive officer (CEO) and median worker. We find that firms headquartered in US counties with stronger norms of cooperation or social capital have lower tournament and income differences. Firm value is higher when compensation is consistent with local norms. The results hold for alternative measures of social capital, instrumental variables, and quasi-experiments related to the legalization of marijuana and firm headquarter relocation. These findings suggest that local social norms influence income differences and firm performance.