Referral Networks and Inequality

Statistical theories of discrimination in labor markets

Manolis Galenianos

The Economic Journal, 2021, vol. 131, issue 633, 271-301

Abstract: This is the first article to study the interaction between labour markets and endogenous referral networks in the context of worker heterogeneity. In equilibrium the structure of the referral network is hierarchical, which is different from the usual assumption of homophily but is consistent with the evidence. Hierarchy exacerbates inequality. The welfare effects of the use of referrals are subtle and depend on the nature of heterogeneity. If heterogeneity is due to productivity differences, referrals improve welfare. If workers face the different probability of forming a match despite having the same productivity, as in the case of discrimination, referrals reduce welfare.

Date: 2021
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Working Paper: Referral networks and inequality (2016)
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