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Employee referral, social proximity and worker discipline: Theory and Evidence from India

Author

Listed:
  • Amrita Dhillon
  • Vegard Iversen
  • Gaute Torsvik

Abstract

We develop a new theory of employee referrals into informal low - and unskilled jobs in developing country labour markets. Employers use social preferences between referees and new recruits to mitigate moral hazard problems in the workplace. We show that employers prefer to hire workers with strong social ties to referees and deliberately select referees with high stakes in the firm. In-depth primary data on low- and unskilled migrants in India are used to provide a suggestive empirical counterpart to these results. Consistent with the theoretical predictions, we observe a high prevalence of referral and of strong social ties between referees and new recruits. Further, workplace intermediaries are different from and typically in higher stake and more ‘prestigious’ jobs than those recruited. Detailed evidence on wages and job types from the main sector of migrant employment provides additional support for our moral hazard explanation for referral.

Suggested Citation

  • 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.
  • Handle: RePEc:chm:wpaper:wp2015-1
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    References listed on IDEAS

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    1. repec:dse:indecr:0095 is not listed on IDEAS
    2. Dhillon, Amrita & Peeters, Ronald & Muge Yukse, Ayse, 2014. "Overcoming Moral Hazard with Social Networks in the Worksplace: An Experimental Approach," CAGE Online Working Paper Series 183, Competitive Advantage in the Global Economy (CAGE).
    3. Kaivan Munshi, 2014. "Community Networks and the Process of Development," Journal of Economic Perspectives, American Economic Association, vol. 28(4), pages 49-76, Fall.
    4. 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.
    5. Munshi, K., 2017. "Caste and the Indian Economy," Cambridge Working Papers in Economics 1759, Faculty of Economics, University of Cambridge.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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