Hiring Through Referrals in an Experimental Market with Adverse Selection

32 Pages Posted: 6 May 2019

See all articles by Aurelie Dariel

Aurelie Dariel

New York University (NYU) - New York University Abu Dhabi

Arno Riedl

Maastricht University; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute)

Simon Siegenthaler

University of Texas at Dallas, Naveen Jindal School of Management

Date Written: April 19, 2019

Abstract

Information asymmetries can prevent markets from operating efficiently. An important example is the labor market, where employers face uncertainty about the productivity of job candidates. We examine theoretically and with laboratory experiments three key questions related to hiring via referrals when employees have private information about their productivity. First, do firms use employee referrals when there are social ties between a current employee and a future employee? Second, does the existence of social ties and hiring through employee referrals indeed alleviate adverse selection relative to when social ties do not exist? Third, does the existence of social ties have spill-over effects on wages and hiring in competitive labor markets? The answers to all three questions are affirmative. However, despite the identified positive effect of employment referrals, hiring decisions fall short of the (second-best) efficient outcome. We identify risk aversion as a potential reason for this.

Keywords: adverse selection, labor market, employee referrals, social networks

JEL Classification: C92, D82, D85, E20

Suggested Citation

Dariel, Aurelie and Riedl, Arno M. and Siegenthaler, Simon, Hiring Through Referrals in an Experimental Market with Adverse Selection (April 19, 2019). Available at SSRN: https://ssrn.com/abstract=3368383 or http://dx.doi.org/10.2139/ssrn.3368383

Aurelie Dariel

New York University (NYU) - New York University Abu Dhabi ( email )

PO Box 129188
Abu Dhabi
United Arab Emirates

Arno M. Riedl (Contact Author)

Maastricht University ( email )

Department of Economics (AE1)
P.O. Box 616
Maastricht, 6200 MD
Netherlands

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Simon Siegenthaler

University of Texas at Dallas, Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

HOME PAGE: http://www.simonsiegenthaler.com

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