The Value of Professional Ties in B2B Markets

We study how a particular form of social ties (i.e., professional ties proxied by past employment) affect price and profitability in business-to-business (B2B) markets. While most of the work on social ties focuses on information diffusion in business-to-consumer markets, we ask: Do B2B buyers receive higher or lower prices from sellers with whom they have professional ties? Answering this question is challenging because it is difficult to observe B2B prices, the individual decision-makers (IDMs), and elements of differentiation that drive price variation. Moreover, potentially endogenous formation of social ties exacerbates the identification challenge. We resolve these challenges by leveraging confidential data from the Federal Reserve on the repo market, the largest market for short-term loans with daily transactions of over $2 trillion. In addition, we use financial disclosure laws to unmask IDMs at sellers and use LinkedIn to reveal their ties. We leverage exogenous movement of IDMs in and out of decision-making positions to identify the effect of professional ties on price. We show that a seller IDM who is the buyer's former employee charges the buyer 25 basis points more than other buyers with no ties (relative to median price). The mechanism driving this price increase involves a \reliability premium." Sellers with a professional tie to the buyer act more reliably towards the buyer in the face of supply-demand imbalances. We show robustness of our results using numerous additional analyses. Our work suggests professional ties can affect B2B prices beyond observable supply-demand dynamics and provide value for sellers and buyers.