Diversity, Social Goods Provision, and Performance in the Firm

• Author: Wallace P. Mullin,Sara Fisher Ellison
• DOI: http://doi.org/10.1111/jems.12051
• Date: 01 June 2014
• Published date: 01 June 2014

Diversity, Social Goods Provision, and Performance

in the Firm

SARA FISHER ELLISON

Department of Economics

MIT, Cambridge, MA 02142

sellison@mit.edu

WALLACE P. MULLIN

Department of Economics

George Washington University

Washington, DC 20052

wpmullin@gwu.edu

Economists have studied the effect of diversity on the provision of social goods and the stock

of social capital. In parallel, management scholars have studied the effect of diversity in the

workplace on firm performance. We integrate these two growing literatures and explore these

questions with a unique dataset. A firm provided eight years of individual-level employee survey

data, which include measures of the stock of social capital, plus office-level measures of diversity

and performance. We find some evidence that more gender-homogeneous offices enjoy higher

levels of social goods provision but those offices do not perform any better and may actually

perform worse.

1. Introduction

Legal and societal shifts in 20th Century America laid the groundwork for increased

diversity in many settings. Schools ceased to be racially segregated. Barriers to female

and minority employment diminished, leading to more diverse workplaces. Greater

mobility resulted in neighborhoods fragmented in various dimensions. The consequent

social benefits of this increased diversity, though difficult to quantify, may be quite

important. With these broad social changes as a backdrop, the focus of this paper is

smaller but sharper.We are interested in how diversity in a group affects the provision of

social goods in the group, and then, ultimately,performance of that group. In particular,

we focus attention on diversity in a market environment, that created by a firm and its

workforce. Regardless of the cause of the increased workplace diversity, it is the job of the

managers to encourage the greatest productivity possible from their units, maximizing

profits, perhaps, or some other quantifiable outcome. It is our goal, then, to shed light

on how diversity is associated with those outcomes.

Because these and related questions of diversity, social goods, and performance

are of fundamental interest outside of workplace settings as well, it is not surprising

that our research bears upon several strands of literature, including ones in strategic

Ellison thanks the NSF for its support and the Institute for Advanced Study for its support and hospitality

while conducting this research as the Richard B. Fisher Member. Mullin thanks the GWIPP for its research

support. Jeffrey Greenbaumprovided excellent research assistance. Glenn Ellison, a coeditor and referees, and

various seminar participants have provided very useful comments and suggestions. Finally, we especially

thank to John Chuang and Matthew Grant for their invaluable assistance in providing these data.

C2014 Wiley Periodicals, Inc.

Journal of Economics & Management Strategy, Volume23, Number 2, Summer 2014, 465–481

466 Journal of Economics & Management Strategy

management, organizational behavior, sociology, and economics. Economists and soci-

ologists have focused more on the first of our two questions, how diversity in a group

affects the provision of social goods. Management scholars, in contrast, have focused

more on the second question, how diversity affects the performance of the group. In fact,

part of the contribution we see this paper making is to serve as a sort of bridge between

those literatures.

Economists’ interest in the effect of diversity on the provision of social goods is

ongoing. Studies have found evidence that social goods are provided at a lower level in

communities exhibiting fragmentation on various dimensions. Vigdor (2004) finds that

census response rates are lower in census tracts with higher ethnic fragmentation. Costa

and Kahn (2003) find that desertion rates are higher in Civil Warmilitary companies with

higher age and occupational fragmentation. Glaeser et al. (2000) find that trust is lower

among Harvard undergraduates when race and nationality fragmentation is higher.

Several studies have documented that school funding is higher in more homogenous

communities (see, e.g., Goldin and Katz, 1999; Poterba, 1997; Miguel and Gugerty,2005).1

These results may be quite important in contexts where social goods provision is the

output of interest. However, in some contexts, the social good may be an “intermediate

good.” In the workplace, cooperation, trust, and other social goods may be important

elements of the functioning of an office, but firm owners ultimately care about an office’s

performance, as reflected in revenues, costs, and profits. We would also like to address

this additional question, so often missing in the economics literature.

Not surprisingly, a sizeable management literature on diversity and performance

exists.2This literature has seen a recent emphasis on the importance of “context” on

the effect that diversity has on performance (see Joshi and Roh, 2009). In other words,

covariates such as industry, profession, and organizational culture could play a role in

determining diversity’s effect. In fact, if we think of the level of social goods in a group

as an element of context, our two-step analysis elucidates the role of context variables

and the mechanisms by which they are important.

Finally, we draw on a paper by Rob and Zemsky (2002), which provides a formal

model of social capital. Modifying their model, we elucidate how diversity could in-

fluence the accumulation of social capital and allow a separate channel for diversity to

affect office performance directly. This model provides testable hypotheses, which can

be evaluated in our empirical setting or by other researchers in different settings.

We have a unique data set from a firm that operates numerous small offices in the

United States and abroad. They have provided us with eight years of individual-level

employee survey data as well as office-level measures of diversity and performance.

The survey data furnish us with several indicators of firm social capital, such the level

of cooperation among employees. The data allow us to address two distinct questions.

First, broadly speaking, do we find lower levels of social goods provision in more

diverse offices? Such a finding has been made in the economics literature cited above,

but our results provide an interesting complement to those: economists have previously

focused on the effects of diversity in communities instead of workplaces,3and we

measure diversity on two dimensions not explored in this literature, gender and tenure.

We do find that higher office-level gender diversity is associated with lower employee

cooperation, but that tenure diversity has little or no effect.

1. See also Costa and Kahn (2003) for an excellent survey of this literature.

2. Two comprehensivesurveys are Williams and O’Reilly (1998) and Shore et al. (2009).

3. Costa and Kahn’s study of Union Army troops is a possible exception.