Drawing on social hierarchy theory, we develop a contingency model of leader–member exchange (LMX) differentiation in which LMX differentiation is positively and negatively related to group cooperation and group social undermining, respectively, when it is based on the group members’ performance, but the relations are reversed (i.e., negative and positive, respectively) when it stems from a leader's personal liking of the members. In addition, we propose that the moderating effects of the performance and personal liking bases of LMX differentiation are magnified by the levels of reward interdependence. Specifically, under a high (vs. low) level of reward interdependence, LMX differentiation based on performance more strongly relates to high group cooperation and low group social undermining, whereas LMX differentiation with a personal liking basis is more likely to decrease group cooperation and increase group social undermining. Group cooperation and social undermining are then hypothesized to convey the three‐way interactive effects of LMX differentiation, its two bases, and reward interdependence on subsequent group performance. Analyses of data from 328 sales groups of a large retailer support the core part of our contingency model of LMX differentiation.
LMX differentiation bases