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Structural Holes and Good Ideas

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Structural Holes and Good Ideas

AJS Volume 110 Number 2 (September 2004): 34999 349

    _ 2004 by The University of Chicago. All rights reserved.

    0002-9602/2004/11002-0004$10.00

    Structural Holes and Good Ideas1

    Ronald S. Burt

    University of Chicago

    This article outlines the mechanism by which brokerage provides social capital. Opinion and behavior are more homogeneous within than between groups, so people connected across groups are more familiar with alternative ways of thinking and behaving. Brokerage across the structural holes between groups provides a vision of options otherwise unseen, which is the mechanism by which brokerage

    becomes social capital. I review evidence consistent with the hypothesis, then look at the networks around managers in a large

    American electronics company. The organization is rife with structural holes, and brokerage has its expected correlates. Compensation, positive performance evaluations, promotions, and good ideas are disproportionately in the hands of people whose networks span structural holes. The between-group brokers are more likely to express ideas, less likely to have ideas dismissed, and more likely to have ideas evaluated as valuable. I close with implications for creativity and structural change.

    The hypothesis in this article is that people who stand near the holes in a social structure are at higher risk of having good ideas. The argument is that opinion and behavior are more homogeneous within than between groups, so people connected across groups are more familiar with alter- 1 Portions of this material were presented as the 2003 Coleman Lecture at the University of Chicago, at the Harvard-MIT workshop on economic sociology, in workshops at the University of California at Berkeley, the University of Chicago, the University of Kentucky, the Russell Sage Foundation, the Stanford Graduate School of Business, the University of Texas at Dallas, Universiteit Utrecht, and the ―Social Aspects of

    Rationality‖ conference at the 2003 meetings of the American Sociological Association.

    I am grateful to Christina Hardy for her assistance on the manuscript and to several colleagues for comments affecting the final text: William Barnett, James Baron, Jonathan Bendor, Jack Birner, Matthew Bothner, Frank Dobbin, Chip Heath, Rachel Kranton, Rakesh Khurana, Jeffrey Pfeffer, Joel Podolny, Holly Raider, James Rauch, Don Ronchi, Ezra Zuckerman, and two AJS reviewers. I am especially grateful to

    Peter Marsden for his comments as discussant at the Coleman Lecture. Direct correspondence

    to Ron Burt, Graduate School of Business, University of Chicago, Chicago, Illinois 60637. E-mail: ron.burt@gsb.uchicago.edu

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    native ways of thinking and behaving, which gives them more options to select from and synthesize. New ideas emerge from selection and synthesis across the structural holes between groups. Some fraction of those

new ideas are good. ―Good‖ will take on specific meaning with empirical

    data, but for the moment, a good idea broadly will be understood to be one that people praise and value.

    Novelty is not a feature of this hypothesis. It is familiar in the sociological theory of Simmel ([1922] 1955) on conflicting group affiliations or Merton ([1948] 1968a, [1957] 1968c) on role sets and serendipity in science.

    The hypothesis is so broadly familiar, in fact, that one can see it in the remarks of prominent creatives. For example, discussing commerce and manners, Adam Smith ([1766] 1982, p. 539) noted that ―when the mind

    is employed about a variety of objects it is some how expanded and enlarged.‖ Swedberg (1990, p. 3) begins his book on academics working the boundary between economics and sociology with John Stuart Mills‘s

    ([1848] 1987, p. 581) opinion that ―it is hardly possible to overrate the

    value . . . of placing human beings in contact with persons dissimilar to themselves, and with modes of thought and action unlike those with which they are familiar. . . . Such communication has always been, and is peculiarly in the present age, one of the primary sources of progress.‖ Jean-

    Rene? Fourtou, former CEO of the French chemical giant Rhoˆne-Poulenc,

    observed that his scientists were stimulated to their best ideas by people outside their own discipline. Fourtou emphasized le videliterally, the

    emptiness; conceptually, structural holesas essential to coming up with

    new ideas (Stewart 1996, p. 165): ―Le vide has a huge function in organizations.

    . . . Shock comes when different things meet. It‘s the interface

    that‘s interesting. . . . If you don‘t leave le vide, you have no unexpected

    things, no creation. There are two types of management. You can try to design for everything, or you can leave le vide and say, ‗I don‘t know

    either; what do you think?‘‖ Biochemist Alex Zaffaroni is an exemplar.

    A former subordinate is quoted in an INSEAD video case explaining Zaffaroni‘s value to his organization: ―He is reading and thinking very

    widely. He is totally unafraid of any new technology in any area of human creativity. He has wonderful contacts with people in many different areas, so he sees the bridges between otherwise disparate fields.‖2

    2 Also see Hatch (1999) on the importance of empty places to the integrated improvisation

    among jazz musicians playing together, Giuffe (1999) on the greater attention given to photographers with careers in networks of sparsely connected photographers, and more broadly, White (1993) on art as a struggle to establish identity in a network of brokering arrangements among agents and other artists. Productive analogy can be drawn to Merton‘s (1968a) view of serendipity in science. Expanding on research‘s

    familiar passive role in testing theory, Merton discusses active roles that research can play in shaping theory, one of which is the serendipity pattern in which an ―unanticStructural

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    Though the hypothesis might lack novelty, it is intrinsically interesting to people who work with ideas and has a role in the theory of social

    capital. The link between good ideas and structural holes is key to the social capital of brokerage. I begin, in the next section, explaining how brokerage across structural holes provides a vision advantage that can translate into social capital. I then turn to a study population rich in structural holes and in which people are rewarded for building relations across the holes. If brokerage affects performance through the proposed vision advantage, there should be evidence of brokerage being associated with good ideas. I find that there is.

    SMALL WORLDS, BROKERAGE, AND THE VISION ADVANTAGE

    Social capital exists where people have an advantage because of their location in a social structure. There is a great variety of work on the subject (e.g., Coleman 1990; Portes 1998; Lin 2002). The generic context is a social structure such as the one illustrated in figure 1. This figure shows a sociogram in which lines indicate where information flows more routinely, or more clearly, between people or groups, which are represented by dots. Solid lines indicate stronger flow. The defining features of the social structure are clusters of dense connection linked by occasional bridge relations between clusters. As a point of reference for later discussion, a network segment is enlarged in the overlay box to highlight four clusters. Clusters A, B, and C are variably closed-network groups in the sense that relations are more dense within than between the groups. (The density table within the figure shows average relations within and between groups.) Cluster D (represented by open dots in the figure) is defined by structural equivalence. (The density table shows that people in cluster D have stronger relations with group C than with one another.) Structures of clusters connected by bridges occur in a wide variety of circumstances across different levels of aggregation (Watts and Strogatz 1998). Whether communities in a geographic region, divisions in a corporation, groups within a profession, or members of a team, people specialize within clusters and integrate via bridges across clusters.

    ipated, anomalous, and strategic datum‖ exerts pressure for initiating theory (p. 158).

    Serendipity must involve an unanticipated result (datum) inconsistent with established facts or the theory being tested, but the third attribute, strategic, is the key that distinguishes Merton‘s view. The strategic value of a research result lies in its

    implications

    for generalized theory, by which Merton (1968a, p. 159) refers to ―what the

    observer brings to the datum rather than to the datum itself.‖ Research has strategic

    value when an observer sees how a finding has implications for what other people see as unrelated theory. The creative spark on which serendipity depends, in short, is to see bridges where others see holes.

    Fig. 1.The small world of markets and organizations

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    The social structure represented in figure 1 corresponds to a division of labor familiar from Durkheim ([1893] 1933) but here focused on network structure within and across cluster specializations. Illustrative work in

    economics on factors responsible for such structures ranges from Hayek (1937, 1945) on the division of labor dependent on coordination across individuals with specialized knowledge (see Birner [1999] for explicit network imagery) to Becker and Murphy (1992) on the incentives to integrate rather than specialize (cf. Meltzer [2001] on integrating specialists in medical care). Network studies of such structures in sociology are illustrated by Feld (1981) on the social foci responsible for network clusters, building on Festinger, Schachter, and Back‘s (1950) analysis of location effects in

    network formation and Blau‘s (1977) work on integration parameters of

    social structure (cf. Bothner, Stuart, and White [2003] on cohesion with status differentiation). Applications to organization networks show the reproduction of ties (e.g., Gulati 1995; Gulati and Gargiulo 1999) in robust bridge-and-cluster structures (e.g., Kogut and Walker 2001; Baum, Shipilov, and Rowley 2003).

    Two leadership roles are highlighted and are illustrated by Robert and James in figure 1. These two roles have long been studied in the literature

    for example, Schumpeter ([1912] 1934) on entrepreneurial ―leaders‖

    bringing together elements from separate production spheres in which people live by routines, Merton ([1949] 1968b) and Katz and Lazarsfeld

    (1955) on the diffusion of tastes through cosmopolitan ―opinion leaders‖

    whose relationships bridge the gaps between social worlds (see also Burt 1999), Rees (1966) on ―extensive‖ search for information on job opportunities

    versus ―intensive‖ search for information about a specific opportunity,

    Milgram (1967) and Travers and Milgram (1969) on the ―small

    world‖ phenomenon in which people at great geographic distance can

    communicate with one another through surprisingly few intermediaries because of bridges between social worlds (see Watts 1999), Granovetter (1973) on the critical role that ―weak ties‖ would play in information access

    and flow if bridge relations were weak rather than strong, Burt (1982, 1992) on the information access and control advantages created when relations span the ―structural holes‖ between groups, March (1991) on

    organizations ―exploring‖ for new opportunities versus ―exploiting‖ known

    revenue streams, or Padgett and Ansell (1993) on the ―robust action‖ made

    possible by structural holes between groups (cf. Fernandez and Gould [1993] on government agents bridging structural holes). A theme in this work is that behavior, opinion, and information, broadly conceived, are more homogeneous within than between groups. People focus on activities inside their own group, which creates holes in the information flow between groups, or more simply, structural holes.

    Robert is better positioned than James for the social capital of broAmerican Journal of Sociology

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    kerage. The seven people connected to James are densely connected with one another within cluster B. The seven people connected to Robert are not connected with one another and are drawn from separate groups A, B, and C. Where James is positioned to integrate the work of people who

    have much in common, Robert is positioned to benefit from differences between people who vary in their behavior and opinions. Where James is positioned to drive variation out of group B, Robert is positioned to introduce into group B variation from groups A and C, with which he is familiar. Given greater homogeneity within than between groups, people whose networks bridge the structural holes between groups have earlier access to a broader diversity of information and have experience in translating information across groups. This is the social capital of brokerage (Burt 1992, 2000, 2002). People whose networks bridge the structural holes between groups have an advantage in detecting and developing rewarding opportunities. Information arbitrage is their advantage. They are able to see early, see more broadly, and translate information across groups. Like over-the-horizon radar in an airplane, or an MRI in a medical procedure, brokerage across the structural holes between groups provides a vision of options otherwise unseen.

    There are shades of gray. Robert is better positioned than James for brokerage, but note in the figure 1 insert box how James connects a northern and southern segment of cluster B. Within his immediate environment, James has strong ties to both segments and so is positioned to broker their integration. The caution here is that structural holes and brokerage can be found in almost any task, depending on point of view. That caution stated, there is abundant and accumulating empirical evidence of increased returns to brokeragein terms of more positive

    performance evaluations, faster promotions, higher compensation, and more successful teams (e.g., see Burt [2000, 2002] for review and Lin [2002] for broader context). There are also returns of a less desirable kind, such as success in organized crime (Williams 1998; Morselli 2003), fraud (Tillman and Indergaard 1999), or corporate misgovernance (Mitchell 2003, on Enron and Worldcom). Whatever the returns, constructive or corrosive, the issue in this article is not whether brokerage yields returns; at issue is the mechanism by which brokerage yields its documented returns.

    Evidence on the mechanism is not abundant. Initial research established the social capital potential of brokerage by focusing on aggregate and contingent returns to brokerage. The association cannot be causal. Networks do not act, they are a context for action. The next phase of work is to understand the information arbitrage by which people acting as brokers harvest the value buried in structural holes. Padgett and Ansell‘s

    (1993) description of robust action is an exemplar. More generally, the Structural Holes and Good Ideas

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    sociology of information will be central in the work, but there are many variations.

    For example, consider four levels of brokerage through which a person could create value. The simplest act of brokerage is to make people on both sides of a structural hole aware of interests and difficulties in the

other group. People who can communicate these issues between groups

    are important because so much conflict and confusion in organizations results from misunderstandings of the constraints on colleagues in other groups. Transferring best practice is a higher level of brokerage. People familiar with activities in two groups are more able than people confined within either group to see how a belief or practice in one group could create value in the other and to know how to translate the belief or practice into language digestible in the target group. A third level of brokerage is to draw analogies between groups ostensibly irrelevant to one another. People who recognize that the way other groups think or behave may

    have implications for the value of operations in their own group will have an advantage over those who do not. This step can be difficult, especially for people who have spent a long time inside one group. Such people

    often look for differences between themselves and others to justify their assertion that ―our situation is different‖ so they can feel comfortable

    ignoring beliefs and behaviors different from their own. Differences can always be found if one wants to find them. The question is whether there are, by analogy, elements of belief or practice in one group that could have value in another. Synthesis is a fourth level of brokerage. People familiar with activities in two groups are more likely to see new beliefs or behaviors that combine elements from both groups.3

    3 I ignore idea content across the four levels of brokerage in idea production. I have two reasons: data and traction. It would be difficult to accurately and reliably evaluate ideas across a foreign content domain. Below, I defer to senior management in the study population. Second, I have no tools that provide novel insights into idea content (relative to the network analysis tools that can pry open the link between ideas and social structure). The presumption in this article is that the content of ideas reflects the social structure in which they emerge. If you vary the groups to which a person is attached, you vary the content of the person‘s ideas. I do not believe that this is

    entirely true, but my hypothesis is that there is some truth to it. The other extreme would be to ignore social structure to focus entirely on the organization of bits and bytes within an idea. Czernich and Heath (2001) provide an illustration. They describe the dot-com evolution of the idea that Web site value increases with its number of viewers. They describe analogies to other ideas and recombinations of elements within the idea. Sociologists will recognize the sociolinguistics of ethnomethodology and the indexical nature of expressions in the analysis (e.g., Denzin 1969; Hudson 1980), but the familiar microlevel insights are used by Czernich and Heath to describe macrolevel change in market rhetoric. The subject could be analyzed from the perspective of this article. The brokerage hypothesis says that analogies and recombinations in the evolution of ―eyeballs to Web sites‖ should have come from people with attachments to

    the separate groups focused on the elements across which analogies and combinations American Journal of Sociology

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    Given these four levels of information arbitrage, one could draw the

    conclusion from industry and organization stories that brokers are critical to learning and creativity. People whose networks span structural holes

    have early access to diverse, often contradictory, information and interpretations, which gives them a competitive advantage in seeing good

    ideas. To be sure, ideas come over a variety of paths from a variety of sources (e.g., Von Hippel 1988; Geroski and Mazzucato 2002; Menon and Pfeffer 2003), but idea generation at some point involves someone moving knowledge from this group to that, or combining bits of knowledge across groups. Where brokerage is social capital, there should be evidence of brokerage being associated with good ideas, and vice versa.

    EVIDENCE ANECDOTAL AND AGGREGATE

    Anecdotal evidence for the outlined hypothesis can be found in the remarks of prominent creatives, such as the quotes from Mills and Fourtou with which I introduced this article. Archives on historical figures link brokerage and ideas in wider perspective. For example, Caro (1982, chap. 15) describes Lyndon Johnson‘s creation of a Washington power base in

    1933 from the ―Little Congress,‖ through which he brokered connections

    between journalists and prominent people in government. Dalzell (1987, p. 1) describes Francis Lowell‘s role as broker in creating the American

    cotton industry. DiMaggio (1992, esp. pp. 12930) describes Paul Sachs‘s

    role as broker in establishing the Museum of Modern Art in New York: ―Sachs could employ his talents precisely because his strong ties to sectors

    that had previously been only weakly connectedmuseums, universities,

    and financeplaced him at the center of structural holes that were critical to the art world of his time.‖ Padgett and Ansell (1993) describe Cosimo

    de Medici‘s use of contacts with opposing family factions to establish his

    Medicean political party in Renaissance Florence. McGuire and Granovetter (in press) describe Samuel Insull‘s use of his network of contacts

    in finance, politics, and technology to shape the electric utility industry at the turn of the century (cf. Sediatis [1998, esp. pp. 37374] on the

    greater flexibility, adaptability, and volume of business in Russian comwere made. For example, Collins (1987, p. 67) refers to an imaginary social life of intellectuals (cf. White [1993] on the dialogue between artist and art world and Collins [1998, chap. 1] for elaboration): ―The intellectual alone, reading or writing . . . is not

    mentally alone. His or her ideas are loaded with social significance, because they symbolize membership in existing and prospective coalitions in the intellectual network. New ideas are created as combinations of old ones; and the intellectual‘s creative

    intuitions are feelings of what groups these ideas are appealing to [and against which intellectual enemies]. The market structure of the intellectual world is transposed into the creative individual‘s mind‖).

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    modity markets created by organizers who had little previous contact with one another and Granovetter [2002] on polycentric networks facilitating economic cooperation). In his panoramic analysis of the history of philosophy, Collins presents sociograms of intergenerational social networks among philosophers to illustrate his argument that the philosophers of greatest repute tended to be rivals representing conflicting schools of

thought for their generation: ―The famous names, and the semi-famous

    ones as well who hold the stage less long, are those persons situated at just those points where the networks heat up the emotional energy to the highest pitch. Creativity is the friction of the attention space at the moments when the structural blocks are grinding against one another the hardest‖ (Collins 1998, p. 76).

    There is related evidence of this at the aggregate level of organizations. In particular, it has been popular to study the ways in which technological change affects social structure at the same time that social structure affects technological advance (e.g., Barley [1990, pp. 9295] provides crisp illustration

    with network data). Electronics and biotechnology have been favored research sites, with the works of Walter Powell (e.g., Powell and Brantley 1992; Powell, Koput, and Smith-Doerr 1996; Powell et al. 1999; Koput and Powell 2003) and Toby Stuart (Stuart 1998; Stuart, Hoang, and Hybels 1999; Stuart and Podolny 1999; Sorenson and Stuart 2001) serving as prominent ports of entry into the research. More generally, Kogut (2000) builds on a series of papers (e.g., Kogut and Zander 1992, 1996; Walker, Kogut, and Shan 1997; Kogut and Walker 2001) to propose a network theory of the firm in which value is derived from a firm‘s

    ability to create and lay claim to knowledge derived from its own membership and participation in networks (cf. Nahapiet and Ghoshal [1998] on social capital and knowledge and Powell and Smith-Doerr [1994] on information issues in the economic sociology of networks, especially with respect to interorganization networks). Structural holes are a correlate of organizational learning, often discussed in terms of ability to learnwhat

    Cohen and Levinthal (1990, p. 128) describe as an organization‘s absorptive

    capacity, that is, ―the ability of a firm to recognize the value of

    new, external information, assimilate it, and apply it to commercial ends,‖

    which can be studied in terms of industry factors, internal networks, and external networks that enhance absorptive capacity (see Argote 1999; Kogut 2000; Knoke 2001; Argote, McEvily, and Reagans 2003). Organizations with management and collaboration networks that bridge structural holes in their markets seem to learn faster and be more productively creative. Sutton and Hargadon (1996) describe processes by which a firm, IDEO, used brainstorming to create product designs. They then clarify in Hargadon and Sutton (1997) the brokerage function served (see Hargadon [2002] for broader discussion). The firm has clients in American Journal of Sociology

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    diverse industries. In the brainstorming sessions, technological solutions from one industry are used to solve client issues in other industries where the solutions are rare or unknown. The firm profited, in other words, from bridge relations through which employees brokered technology flow between industries (cf. Allen and Cohen [1969] on gatekeepers, Lazega and Pattison [2001] on network management of status auctions, Argote [1999] and Argote et al. [2003] on organizations moving down a learning

    curve). Fleming (2002) describes such a process within Hewlett-Packard where company policy was to move engineers between projects rather than having each project hire and fire individually. The result was that Hewlett-Packard technologies were constantly mixed in new combinations. As an engineer described the experience: ―I had to work in a single

    field for only two or three years and then like magic it was a whole new field; a paradise for creativity‖ (Fleming 2002, p. 1073).

    Similar results are available across organizations. Provan and Milward (1995) show higher performance from mental-health systems with a hierarchical rather than a dense network structure. Geletkanycz and Hambrick (1997) report higher company performance when top managers have boundary-spanning relationships beyond their firm and beyond their industry. McEvily and Zaheer (1999) report greater access to competitive ideas for small manufacturers with more nonredundant sources of advice beyond the firm (and McEvily and Marcus [2002] show lower absorptive capacity when the sales network is concentrated in a single customer). Stuart and Podolny (1999) report a higher probability of innovation from semiconductor firms that establish alliances with firms outside their own technological area. Comparing biotechnology districts inMinneapolis and Philadelphia, Llobrera, Meyer, and Nammacher (2000) attribute the growth and adaptation of Philadelphia‘s district to its many nonredundant

    networks around organizations in the district. Baum, Calabrese, and Silverman (2000) study Canadian companies in biotechnology for growth in revenues, number of patents granted, and the extent to which a company had multiple kinds of alliance partners at start-up. Companies with a heterogeneous mix of alliance partners enjoyed faster revenue growth and a dramatic advantage in obtaining patents. Koput and Powell (2003) report higher earnings and survival chances of biotechnology firms with more kinds of activities in alliances with more kinds of partner firms. Podolny (2001) describes venture-capital firms spanning structural holes by linking coinvestors that were not otherwise investing together. Firms with a ―deal-flow‖ network that often spans structural holes invest more

    often in early product developmentwhere the information benefits of

    spanning structural holes could be a competitive advantage in detecting potentially valuable ideasand are more successful in developing their

    early-stage investments into profitable IPOs (cf. Beckman and Haunschild Structural Holes and Good Ideas

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    [2002] on firms with more heterogeneous boards of directors paying lower premiums for acquisitions, Ruef [2002] on the tendency for entrepreneurs ―attempting to combine disparate ideas or routines‖ to discuss their venture

    with varied kinds of contacts, Shane and Cable [2002] on early-stage investors using social networks to decide between ventures, and Pollock, Porac, and Wade [2003] for a review of the brokerage role in creating deal networks).

    SUPPLY CHAIN IN A LARGE ELECTRONICS COMPANY

    The cited work offers anecdotal and aggregate evidence consistent with the hypothesis that brokerage increases the risk of having a good idea. To study the hypothesis at the level of individual people proposing ideas, I draw on data describing 673 managers who ran the supply chain in 2001 for one of America‘s largest electronics companies. Here, as in most

    walks of life, people vary in the quality of their ideas. The study population was going through a leadership change triggered by exogenous events. The incoming leadership thought that a Web-based network analysis would be a quick way to become familiar with the current informal organization of leaders in the supply chain. They believed that knowing the current organization would be useful for thinking about and communicating future strategy.

    Background Data

    Data on manager backgrounds were taken from company personnel records. This provided the organization division and the geographic site where a manager worked, as well as the manager‘s job rank. An executive

    rank was composed of people with job titles of director or vice president. Below them were senior managers, followed by managers 3, 2, and 1. Further, managers at all ranks were assigned to one of two roles in the supply chain: some purchased goods from external vendors, while others moved goods inside the company. I include the role distinction because purchasing pays a higher salary ($22,111 higher on average, 5.4 t-test)

    and could affect a manager‘s ideas about the supply chain since it involves

    contacts in other companies.

    I recorded manager education because it is so integral to the concept of human capital, especially for a study of ideas. A substantial number of the managers had gone to graduate school (25% held master‘s degrees,

    and 3% held doctorates). A similar number had less than a college degree (17% had some college, short of a bachelor‘s degree, and 10% had a high

    school education or less). I also looked at race (86% of the study population American Journal of Sociology

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    was white), gender (26% female), and marital status (78% married), but none was a statistically significant predictor or slope-adjustment in the analysis, so they are not reported.

    Judging from age and seniority, there was a great deal of work experience in the study population. The average manager was 50 years old, had worked 18 years in the company, and had known his or her cited discussion partners for 8 years. Many managers had spent their whole career in the company. A large number had spent their whole career in the industry. Age turned out to be more strongly correlated with performance and idea value, so I use age as the control for work experience. Network Data

    Network data were collected by the standard survey method of name generators and interpreters (e.g., Marsden 1990, 2004). The Web-based questionnaire contained two name generators. After managers were asked

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