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Learning Through Referrals

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  • Manolis Galenianos

    (Pennsylvania State University)

Abstract

This paper theoretically examines the firm's choice to use different search channels in order to hire new workers. An equilibrium model is developed where the quality of a match is uncertain and firms search for workers through the market and through referrals. The intensity of use of each search channel is endogenized through the choice of channel-specific search effort. When referrals generate more accurate signals regarding match quality, the model predicts that referred workers have higher starting wages, higher productivity and lower separation rates than non-referred candidates and that these differentials decrease over time due to selection, which is consistent with the data. The model is extended by introducing productivity heterogeneity in firms and allowing the endogenous determination of signal quality. It is shown that high productivity firms choose greater accuracy of signals which diminishes the referral-market differential and leads to lower referral intensity, consistent with the data. This type of selection on the firm side explains why regressions that do not include firm fixed effects find a negative effect of referrals on wages in contrast to firm-level and other evidence.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 814.

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Date of creation: 2012
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Handle: RePEc:red:sed012:814

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  1. Giorgio Topa & Stephen Ross & Patrick Bayer, 2005. "Place of Work and Place of Residence: Informal Hiring Networks and Labor Market Outcomes," Working Papers 05-23, Center for Economic Studies, U.S. Census Bureau.
  2. Samuel Bentolila & Claudio Michelacci & Javier Suarez, 2004. "Social Contacts And Occupational Choice," Working Papers wp2004_06, CEMFI.
  3. Michael J. Pries, 2004. "Persistence of Employment Fluctuations: A Model of Recurring Job Loss," Review of Economic Studies, Oxford University Press, vol. 71(1), pages 193-215.
  4. Joshua C. Pinkston, 2012. "How Much Do Employers Learn from Referrals?," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 51(2), pages 317-341, 04.
  5. Michele Pellizzari, 2004. "Do Friends and Relatives Really Help in Getting a Good Job?," CEP Discussion Papers dp0623, Centre for Economic Performance, LSE.
  6. Datcher, Linda, 1983. "The Impact of Informal Networks of Quit Behavior," The Review of Economics and Statistics, MIT Press, vol. 65(3), pages 491-95, August.
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