Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/196785 
Year of Publication: 
2019
Series/Report no.: 
IZA Discussion Papers No. 12287
Publisher: 
Institute of Labor Economics (IZA), Bonn
Abstract: 
Information asymmetries can prevent markets from operating efficiently. An important example is the labor market, where employers face uncertainty about the productivity of job candidates. We examine theoretically and with laboratory experiments three key questions related to hiring via referrals when employees have private information about their productivity. First, do firms use employee referrals when there are social ties between a current employee and a future employee? Second, does the existence of social ties and hiring through employee referrals indeed alleviate adverse selection relative to when social ties do not exist? Third, does the existence of social ties have spill-over effects on wages and hiring in competitive labor markets? The answers to all three questions are affirmative. However, despite the identified positive effect of employee referrals, hiring decisions fall short of the (second-best) efficient outcome. We identify risk aversion as a potential reason for this.
Subjects: 
adverse selection
labor market
employee referrals
social networks
JEL: 
C92
D82
D85
E20
Document Type: 
Working Paper

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