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Overcoming moral hazard with social networks in the workplace: An experimental approach

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Listed:
  • Dhillon, Amrita

    (King's College London)

  • Peeters, Ronald

    (Maastricht University)

  • Yuksel, Ayse Muge

    (Maastricht University)

Abstract

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 combined eld-laboratory experiment that social networks are used by employers to reduce worker moral hazard. The worker chooses an e ort level given a xed wage under di erent settings of social proximity. Social proximity is captured using actual Facebook friendship information revealed anonymously to 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 about 80% of the time. In keeping with our predictions, 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 moral hazard and directed altruism as the main driving forces for these results.

Suggested Citation

  • Dhillon, Amrita & Peeters, Ronald & Yuksel, Ayse Muge, 2014. "Overcoming moral hazard with social networks in the workplace: An experimental approach," CAGE Online Working Paper Series 206, Competitive Advantage in the Global Economy (CAGE).
  • Handle: RePEc:cge:wacage:206
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    References listed on IDEAS

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    Cited by:

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    2. Afridi, Farzana & Dhillon, Amrita & Sharma, Swati, 2015. "Social Networks and Labour Productivity: A Survey of Recent Theory and Evidence," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 50(1), pages 25-42.
    3. Mol, Jantsje M. & Botzen, W. J. Wouter & Blasch, Julia E., 2020. "Risk reduction in compulsory disaster insurance: Experimental evidence on moral hazard and financial incentives," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 84(C).

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    More about this item

    Keywords

    Eciency wage contracts; Moral hazard; Dictator game; Referrals; Altruism; Reciprocity; Directed altruism; Social proximity; Facebook; Experiment; Social networks; Strength of ties; Spot market.;
    All these keywords.

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