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

36 Pages Posted: 27 Jul 2005

See all articles by Alessandra Casella

Alessandra Casella

Columbia University - Graduate School of Arts and Sciences, Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Nobuyuki Hanaki

Osaka University - Institute of Social and Economic Research

Multiple version iconThere are 2 versions of this paper

Date Written: March 2005

Abstract

Economists and sociologists disagree over markets' potential to take over functions typically performed by networks of personal connections. First among them is the reliable transmission of information. In this paper, we begin from a model of labor markets where social ties are stronger between similar individuals, and thus firms employing productive workers prefer to rely on personal referrals by their employees than to hire on the open anonymous market (Montgomery (1991)). However, we allow workers in the anonymous market to engage in a costly action that has the potential to signal their high productivity. We study the extent to which the possibility of signalling reduces the reliance on the network. We find that the network is remarkably resilient - only for a small minority of parameter values does the network disappear. The problem is that to be effective signalling 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.

Keywords: Networks, signalling, referral hiring, referral premium

JEL Classification: A14, D83, J31, J41

Suggested Citation

Casella, Alessandra and Hanaki, Nobuyuki, Information Channels in Labor Markets. On the Resilience of Referral Hiring (March 2005). CEPR Discussion Paper No. 4969, Available at SSRN: https://ssrn.com/abstract=771504

Alessandra Casella (Contact Author)

Columbia University - Graduate School of Arts and Sciences, Department of Economics ( email )

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Nobuyuki Hanaki

Osaka University - Institute of Social and Economic Research ( email )

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