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

Alessandra Casella () and Nobuyuki Hanaki ()

No 4969, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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; signalling (search for similar items in EconPapers)
JEL-codes: A14 D83 J31 J41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-net and nep-ure
Date: 2005-03
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Related works:
Working Paper: Information channels in labor markets: On the resilience of referral hiring (2005)
Working Paper: Information Channels in Labor Markets. On the Resilience of Referral Hiring (2005)
Journal Article: Information channels in labor markets: On the resilience of referral hiring (2008)
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