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The Value of Hiring through Referrals

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Author Info

  • Burks, Stephen V.

    ()
    (University of Minnesota, Morris)

  • Cowgill, Bo

    ()
    (University of California, Berkeley)

  • Hoffman, Mitchell

    ()
    (Yale School of Management)

  • Housman, Michael

    (Evolv on Demand)

Abstract

Employee referrals are a very common means by which firms hire new workers. Past work suggests that workers hired via referrals often perform better than non-referred workers, but we have little understanding as to why. In this paper, we demonstrate that this is primarily because referrals allow firms to select workers better-suited for particular jobs. To test our model, we use novel and detailed productivity and survey data from nine large firms in three industries: call-centers, trucking, and high-tech (software). Referred workers are 10-30% less likely to quit and have substantially higher performance on rare "high-impact metrics" (e.g. creating patents and avoiding truck accidents), despite having similar characteristics and similar performance on non-rare metrics. To identify the source of these behavioral differences, we develop four new statistical tests, all of which indicate that firms benefit from referrals predominantly by selecting workers with a better fit for the job, as opposed to referrals selecting workers with higher overall quality; to referrals enabling monitoring or coaching; or to it being more enjoyable to work with friends. We document that workers refer others like themselves, not only in characteristics but in behavior (e.g. unsafe workers refer other unsafe workers), suggesting that firms may gain by incentivizing referrals most from their highest quality workers. Referred workers achieve substantially higher profits per worker and the difference is driven by referrals from high productivity workers.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7382.

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Length: 66 pages
Date of creation: May 2013
Date of revision:
Handle: RePEc:iza:izadps:dp7382

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Related research

Keywords: referrals; productivity; worker selection; innovation; patents; cognitive ability; non-cognitive ability; job testing; call centers; high-tech; software; trucking; truck accidents;

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References

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  1. Dal Bó, Ernesto & Finan, Frederico S. & Rossi, Martín A., 2012. "Strengthening State Capabilities: The Role of Financial Incentives in the Call to Public Service," IZA Discussion Papers 6645, Institute for the Study of Labor (IZA).
  2. Manuel Trajtenberg, 1990. "A Penny for Your Quotes: Patent Citations and the Value of Innovations," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 172-187, Spring.
  3. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  4. Rustichini, Aldo & DeYoung, Colin G. & Anderson, Jon E. & Burks, Stephen V., 2012. "Toward the Integration of Personality Theory and Decision Theory in the Explanation of Economic and Health Behavior," IZA Discussion Papers 6750, Institute for the Study of Labor (IZA).
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Cited by:
  1. Hensvik, Lena & Nordström Skans, Oskar, 2013. "Social networks, employee selection and labor market outcomes," Working Paper Series 2013:15, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  2. Christopher Stanton, 2013. "Comment on "Digitization and the Contract Labor Market: A Research Agenda"," NBER Chapters, in: Economics of Digitization National Bureau of Economic Research, Inc.

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