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Overcoming Moral Hazard with Social Networks in the Worksplace: An Experimental Approach

  • Dhillon, Amrita

    (Kings College, London)

  • Peeters, Ronald


  • Muge Yukse, Ayse


The use of social networks in the workplace has been documented by many authors, although the reasons for their widespread prevalence are less well known. In this paper we present evidence based on a lab experiment that suggests quite strongly that social networks are used by employers to reduce worker moral hazard. We capture moral hazard with a dictator game between the referrer and worker. The worker chooses how much to return under di erent settings of social proximity. Social proximity is captured using Facebook friendship information gleaned anonymously from subjects once they have been recruited. Since employers themselves do not have access to social connections, they delegate the decision to referrers who can select among workers with di erent degrees of social proximity to themselves. We show that employers choose referrals over anonymous hiring relatively more when they know that the referrer has access to friends, and are willing to delegate more often when the social proximity between referrer and worker is potentially higher. In keeping with this expectation, referrers also choose workers with a greater social proximity to themselves and workers who are closer to referrers indeed pay back more to the referrer. The advantage of the lab setting is that we can isolate directed altruism as the only reason for these results.

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Paper provided by Competitive Advantage in the Global Economy (CAGE) in its series CAGE Online Working Paper Series with number 183.

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Date of creation: 2014
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Handle: RePEc:cge:wacage:183
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  1. Marcel Fafchamps & Alexander Moradi, 2009. "Referral and Job Performance: Evidence from the Ghana Colonial Army," Economics Series Working Papers CSAE WPS/2009-10, University of Oxford, Department of Economics.
  2. Lori Beaman & Jeremy Magruder, 2012. "Who Gets the Job Referral? Evidence from a Social Networks Experiment," American Economic Review, American Economic Association, vol. 102(7), pages 3574-93, December.
  3. Bandiera, Oriana & Barankay, Iwan & Rasul, Imran, 2009. "Social Connections and Incentives in the Workplace: Evidence from Personnel Data," CEPR Discussion Papers 7114, C.E.P.R. Discussion Papers.
  4. Elisabet Rutstrom & Glenn Harrison & Morten Lau, 2004. "Estimating risk attitudes in denmark: A field experiment," Artefactual Field Experiments 00059, The Field Experiments Website.
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  8. 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, vol. 96(4), pages 1225-1252, September.
  9. Glenn W. Harrison & John A. List, 2004. "Field Experiments," Journal of Economic Literature, American Economic Association, vol. 42(4), pages 1009-1055, December.
  10. repec:tpr:qjecon:v:124:y:2009:i:4:p:1815-1851 is not listed on IDEAS
  11. Mobius, Markus & Do, Quoc-Anh & Leider, Stephen & Rosenblat, Tanya, 2009. "Directed Altruism and Enforced Reciprocity in Social Networks," Scholarly Articles 3054685, Harvard University Department of Economics.
  12. Mortensen, Dale T. & Vishwanath, Tara, 1994. "Personal contacts and earnings : It is who you know!," Labour Economics, Elsevier, vol. 1(2), pages 187-201, March.
  13. Amrita Dhillon & Vegard Iversen & Gaute Torsvik, 2015. "Employee referral, social proximity and worker discipline: Theory and Evidence from India," CMI Working Papers 1, CMI (Chr. Michelsen Institute), Bergen, Norway.
  14. Christoph Engel, 2010. "Dictator Games: A Meta Study," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2010_07, Max Planck Institute for Research on Collective Goods, revised Jan 2011.
  15. Montgomery, James D, 1991. "Social Networks and Labor-Market Outcomes: Toward an Economic Analysis," American Economic Review, American Economic Association, vol. 81(5), pages 1407-18, December.
  16. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  17. Simon, Curtis J & Warner, John T, 1992. "Matchmaker, Matchmaker: The Effect of Old Boy Networks on Job Match Quality, Earnings, and Tenure," Journal of Labor Economics, University of Chicago Press, vol. 10(3), pages 306-30, July.
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