Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/103919 
Year of Publication: 
2014
Series/Report no.: 
Center for Mathematical Economics Working Papers No. 511
Publisher: 
Bielefeld University, Center for Mathematical Economics (IMW), Bielefeld
Abstract: 
This paper presents a search model with heterogeneous workers, social networks and endogenous search intensity. There are three job search channels available to the unemployed: costly formal applications and two costless informal channels - through family and professional networks. The gain from being employed is increasing in the productivity, so the lowest motivation for preparing formal applications is proved to be among the least productive worker types. We assume that professional contacts exhibit a strong degree of homophily, thus it is profitable for firms to direct their network search towards the more productive incumbent employees. So the probability of a professional referral is increasing in the productivity of the worker, which mitigates the incentives to use the formal channel of search. Therefore, the model predicts that workers in the right (left) tail of the productivity distribution have the highest propensity of finding a job with a help of professional (family) contacts, whereas the formal channel of search is mostly utilized by workers in the middle range of the distribution. This explains the U-shaped referral hiring pattern in the model. The endogenous sorting of workers across channels also implies that professional (family) referrals are associated with wage premiums (penalties) compared to the formal channel of search. The average effect of referrals on wages is, however, ambiguous and depends on the relative proportions of high and low productivity types in the population. These findings help to explain the contradicting empirical evidence concerning the effect of referrals on wages.
Subjects: 
endogenous search intensity
family contacts
professional networks
U-shape
referral puzzle
wage premiums and penalties
JEL: 
J23
J31
J38
J64
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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