Firm Reorganization: Social Control or Social Contract

Abstract

Firm reorganizations deeply affect employees. Management can reorganize in different ways, focusing on costs or acknowledging the involvement of employees. The latter implies following a social contract that complements incomplete (formal) labor contracts. Little is known about how the way in which firms reorganize affects their subsequent performance. Should a firm reorganize more socially, keeping the concerns of employees in mind as evident from an existing social contract, or should it focus on control the future direction of the firm and the costs made? We show that reorganizing more socially does not increase firm performance ex post, but taking more time when reorganizing does.