Hiring through referrals in a labor market with adverse selection

Aurelie Dariel, Arno Riedl, Simon Siegenthaler

Research output: Working paperOther research output

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.
Original languageEnglish
Place of PublicationMunich
PublisherCESifo
Number of pages33
Publication statusPublished - 2019

Publication series

SeriesCESifo Working Papers
Volume7610
ISSN2364-1428

JEL classifications

  • c92 - Design of Experiments: Laboratory, Group Behavior
  • d82 - "Asymmetric and Private Information; Mechanism Design"
  • d85 - Network Formation and Analysis: Theory
  • e20 - Macroeconomics: Consumption, Saving, Production, Employment, and Investment: General (includes Measurement and Data)

Keywords

  • adverse selection
  • labor market
  • employee referrals
  • social networks

Cite this

Dariel, A., Riedl, A., & Siegenthaler, S. (2019). Hiring through referrals in a labor market with adverse selection. CESifo. CESifo Working Papers, Vol.. 7610 https://www.cesifo.org/DocDL/cesifo1_wp7610.pdf