Working Paper: CEPR ID: DP4969
Authors: Alessandra Casella; Nobuyuki Hanaki
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 labour 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; referral hiring; referral premium; signaling
JEL Codes: A14; D83; J31; J41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| signaling (L96) | referral networks (D85) |
| referral networks (D85) | resilience of referral hiring (J68) |
| signaling requirements (L96) | referral hiring (M51) |
| signaling does not replace referrals (L96) | referral hiring remains advantageous (M51) |
| referral hiring mechanism does not disappear (J63) | robustness of personal networks (D85) |