90/2012 - Amrita Dhillon, Vegard Iversen and Gaute Torsvik

We study ex-post hiring risks in low income countries with limited legal and regulatory frameworks. In our theory of employee referral, the new recruit internalises the rewards and punishments of the in-house referee meted out by the hiring rm. This social mechanism makes it cheaper for the rm to induce worker discipline. The degree of internalization depends on the unobserved strength of the endogenous social tie between the referee and the recruit. When the referee's utility is increasing in the strength of ties, referee workplace incentives do not matter and referee and employer incentives are aligned: in this case industries and jobs with high costs of opportunism and where dense kinship networks can match the skill requirements of employers will have clusters of close family and friends. This no longer applies if the referee's utility is decreasing in the strength of ties: referrals are then more costly for rms and require higher referee wages. We illustrate how these insights add to our understanding of South-Asian labour markets.

Culture and Development

Economic Development and Cultural Change

https://www.journals.uchicago.edu/doi/abs/10.1086/704512