Does Money Always Talk? Social Distance and Fairness in Online Referral Systems

Abstract

Online referral incentive systems help attract new customers to firms by leveraging existing customers' social networks. Designing an appropriate referral incentive system by leveraging social commerce allows firms to enhance their customer base and increase sales. This study integrates the ultimatum game theory (fairness theory) with construal-level theory to hypothesize the role of monetary incentives (referral bonus) and social distance (friends versus acquaintances) in the performance of three competing designs for online referral incentive systems (i.e., rewarding only the proposer, rewarding only the responder, or dividing the reward equally between the two parties). A randomized field experiment was conducted in cooperation with a major online ticketing company to test the effects of the fairness of the split of the monetary incentive (equal split versus unequal split of the referral bonus) and social distance (friends versus acquaintances) between the proposer and the responder on the ultimate performance of online referral incentive systems (responder's acceptance of the proposer’s offer). Interestingly, our results show that for small social distance (friends), a "U" shaped relationship was observed between monetary incentive and referral performance, with referral performance not being affected by the referral bonus. In contrast, for a large social distance (mere acquaintances), an inverted "U" shaped relationship was observed between monetary incentives and referral performance, notably that a fair split of the referral bonus led to the highest referral performance. By studying the interaction effects of monetary incentives relative to social norms, our research contributes and has theoretical and practical implications for the ultimatum game and social commerce by showing that the pursuit of fairness is either useful or harmful for dyadic relationships that differ on their social distance.

Keywords: Electronic commerce, referral performance, social distance, incentive design, ultimatum game theory, construal level theory