Referral Hiring and Wage Formation in a Market with Adverse Selection

33 Pages Posted: 6 May 2019 Last revised: 9 Aug 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); Netspar

Simon Siegenthaler

University of Texas at Dallas, Naveen Jindal School of Management

Date Written: May 17, 2019

Abstract

We examine theoretically and experimentally if referral hiring alleviates adverse selection by answering two key questions. First, to hire high-productivity employees with social ties, are firms willing to offer high wages even if productivity of employees is private information? Second, does hiring through referrals alleviate adverse selection relative to when social ties do not exist? We find that the existence of social ties indeed elevates wages and mitigates adverse selection. However, we also observe that hiring decisions fall short of the (second-best) efficient outcome. We identify risk aversion and the hiring dynamics as a reason for this outcome.

Keywords: Adverse selection, employee referrals, wage formation, social ties

JEL Classification: C92, D82, D85, E20

Suggested Citation

Dariel, Aurelie and Riedl, Arno M. and Siegenthaler, Simon, Referral Hiring and Wage Formation in a Market with Adverse Selection (May 17, 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

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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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