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

Listed author(s):
  • Dhillon, Amrita

    (Kings College, London)

  • Peeters, Ronald

    (Maastrict)

  • Muge Yukse, Ayse

    (Maastrict)

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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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/centres/cage/manage/publications/183-2014_dhillon.pdf
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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
Handle: RePEc:cge:wacage:183
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  1. Christoph Engel, 2011. "Dictator games: a meta study," Experimental Economics, Springer;Economic Science Association, vol. 14(4), pages 583-610, November.
  2. Oriana Bandiera & Iwan Barankay & Imran Rasul, 2009. "Social Connections and Incentives in the Workplace: Evidence From Personnel Data," Econometrica, Econometric Society, vol. 77(4), pages 1047-1094, 07.
  3. Montgomery, James D, 1991. "Social Networks and Labor-Market Outcomes: Toward an Economic Analysis," American Economic Review, American Economic Association, vol. 81(5), pages 1407-1418, December.
  4. 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 3574-3593, December.
  5. Stephen Leider & Markus M. Möbius & Tanya Rosenblat & Quoc-Anh Do, 2009. "Directed Altruism and Enforced Reciprocity in Social Networks," The Quarterly Journal of Economics, Oxford University Press, vol. 124(4), pages 1815-1851.
  6. Kugler, Adriana D., 2003. "Employee referrals and efficiency wages," Labour Economics, Elsevier, vol. 10(5), pages 531-556, October.
  7. Glenn W. Harrison & John A. List, 2004. "Field Experiments," Journal of Economic Literature, American Economic Association, vol. 42(4), pages 1009-1055, December.
  8. Dhillon, Amrita & Iversen, Vegard & Torsvik, Gaute, 2013. "Employee Referral, Social Proximity And Worker Discipline: Theory And Evidence From India," Working Papers in Economics 04/13, University of Bergen, Department of Economics.
  9. Kaivan Munshi, 2003. "Networks in the Modern Economy: Mexican Migrants in the U. S. Labor Market," The Quarterly Journal of Economics, Oxford University Press, vol. 118(2), pages 549-599.
  10. Glenn W. Harrison & Morten I. Lau & E. Elisabet Rutström, 2007. "Estimating Risk Attitudes in Denmark: A Field Experiment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(2), pages 341-368, 06.
  11. Mortensen, D. T. & Vishwanath, T., 1995. "Personal contacts and earnings: It is who you know!," Labour Economics, Elsevier, vol. 2(1), pages 103-104, March.
  12. Marcel Fafchamps & Alexander Moradi, 2015. "Referral and Job Performance: Evidence from the Ghana Colonial Army," Economic Development and Cultural Change, University of Chicago Press, vol. 63(4), pages 715 - 751.
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