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

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  • Amrita Dhillon
  • Vegard Iversen
  • Gaute Torsvik

Abstract

We study an important mechanism underlying employee referrals into informal low skilled jobs in developing countries. Employers can exploit social preferences between employee referees and potential workers to improve discipline. The profitability of using referrals increases with referee stakes in the firm, and, in most cases, with the strength of the social tie between the referee and the new recruit. We provide an empirical counterpart to these results using primary data covering low- and unskilled migrants in India. Consistent with the theoretical predictions, we find a high prevalence of workplace referral and strong kinship ties between referees and new recruits. Finally, workplace intermediaries are different from and typically in more ‘prestigious’ jobs than those recruited.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4309.

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Date of creation: 2013
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Handle: RePEc:ces:ceswps:_4309

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Keywords: networks; low- and unskilled jobs; India; moral hazard; employee referrals; efficiency wages; referee incentives; strength of ties;

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  1. Saloner, Garth, 1985. "Old Boy Networks as Screening Mechanisms," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 3(3), pages 255-67, July.
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  14. Kaivan Munshi & Mark Rosenzweig, 2006. "Traditional Institutions Meet the Modern World: Caste, Gender, and Schooling Choice in a Globalizing Economy," American Economic Review, American Economic Association, American Economic Association, vol. 96(4), pages 1225-1252, September.
  15. Banerjee, Biswajit, 1991. "The determinants of migrating with a pre-arranged job and of the initial duration of urban unemployment : An analysis based on Indian data on rural-to-urban migrants," Journal of Development Economics, Elsevier, Elsevier, vol. 36(2), pages 337-351, October.
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  17. Kei Kajisa, 2007. "Personal Networks and Nonagricultural Employment: The Case of a Farming Village in the Philippines," Economic Development and Cultural Change, University of Chicago Press, vol. 55, pages 669-707.
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