FEEM working papers "Note di lavoro" series
2005 .037

Information Channels in Labor Markets. On the Resilience of Referral Hiring

Authors: Alessandra Casella, Nobuyuki Hanaki
Series: Climate Change and Sustainable Development
Editor: Carlo Carraro
Type: Journal
Keywords: Networks,Signaling,Referral hiring,Referral premium
JEL n.: A14,J31,J41,D83
JEL: Journal of Economic Behavior & Organization
Pages: Vol. 66, Issues 3-4, pp. 492-513
Date: 06/2008


Economists and sociologists disagree over markets' potential to assume functions typically performed by networks of personal connections, first among them the transmission of information. This paper begins from a model of labor markets where social ties are stronger between similar individuals and firms employing productive workers prefer to rely on personal referrals than to hire on the anonymous market (Montgomery (1991). However, we allow workers in the market to engage in a costly action that can signal their high productivity, and ask whether the possibility of signaling reduces the reliance on the network. We find that the network is remarkably resilient. To be effective signaling must fulfill two contradictory requirements: unless the signal is extremely precise, it must be expensive or it is not informative; but it must be cheap, or the network can undercut it.

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