Why Do Firms Hire Using Referrals? Evidence from Bangladeshi Garment Factories

Rachel Heath

Journal of Political Economy, 2018, vol. 126, issue 4, 1691 - 1746

Abstract: I argue that firms use referrals from current workers to mitigate a moral hazard problem. I develop a model in which referrals relax a limited liability constraint by allowing the firm to punish the referral provider if the recipient has low output. I test the model’s predictions using household survey data that I collected in Bangladesh. I can control for correlated wage shocks within a network and correlated unobserved type between the recipient and provider. I reject the testable implications of models in which referrals help firms select unobservably good workers or are solely a nonwage benefit to providers.

Date: 2018
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