Employee Referral, Social Proximity, and Worker Discipline: Theory and Suggestive Evidence from India

Abstract

We propose a new theory to explain why employers mobilize workplace insiders for the hiring of new staff. In settings with incomplete contracts, we show how workplace insiders can help employers tackle recruit discipline challenges at a lower cost. A key idea is that the employer can use sanctions against the referee to keep the new hire in line. Our model predicts that employers will use existing staff of stature and with accumulated goodwill within the firm as referees, since such staff have a personal stake in their choice of recruit. The model also predicts a strong social tie between the referee and the recruit to ensure that the recruit internalizes the costs to the referee of own misbehavior or underperformance. We use a small, in-depth dataset from India to scrutinize how well the predictions of our theory and of the main rival explanations for referral align with hiring patterns, wage and labor turnover observations. We find suggestive support for our theory and argue that these findings are hard to reconcile with rival referral explanations. JEL: J41, J31, D82, D86, O12, O17

Social networks, role models, peer effects, and aspirations

“…Many employers actively encourage referrals from employees' social networks because of the benefit this brings in terms of adverse selection problems and screening (Montgomery 1991). Referred employees may also work harder so as to not make the person who referred them look bad, thus overcoming moral hazard problems (Dhillon et al 2013). However, a key motive for workers to refer others in their network is reciprocity and risk sharing (Beaman and Magruder 2012;Witte 2018), with employees referring those closest to them in their social network, such as family.…”

Strategic party formation on a circle & the role of social proximity in job referrals

“…We use the theoretical model of job referrals from Dhillon et al (2013) and test its predictions. The experiment is not a standard lab experiment since it makes use of the real life information obtained through an online networking website.…”

“…According to the theorem, all parties have at most two politicians in any Nash equilibrium. 14 To see this, suppose a party P has at least three politicians in a Nash equilibrium s (as shown in Figure 2.8(1)). The weight of this party equals l s (P )+r s (P )…”

“…Heath's (2011) research on garment factories in Bangladesh, finds that referrals serve as a disciplining device by employers. Dhillon et al (2013) assume that social proximity encourages altruistic behavior between workers and referrers and provide evidence suggestive of using a referral system to avoid moral hazard as well.…”

“…3 Social networks and connections thus appear to be vital for recruitment and the use of strong ties. Leveraging close ties with friends and family also seems to be a recurring pattern in blue collar jobs (Dhillon et al (2013)). Yet empirical literature on the underlying reasons for the use of social networks in this regard is handicapped by the difficulties in separating the different possible reasons for their use.…”