Letters of Recommendation in the PhD Job Market: Lessons from Specialized Banks

Banks must extract useful signals of a potential borrower’s quality from a large set of possibly informative characteristics when making lending decisions. A model that speaks to how banks specialize in lending to an industry in order to better extract signals from data, can potentially be applied to a number of real-world scenarios. In this post, we apply lessons from such a model to a topic of timely relevance in economics: job market recommendation letters. Institutions looking to hire new economists must evaluate PhD applicants based on limited and often noisy signals of future performance, including letters of recommendation from these applicants’ advisors or co-authors. Using insights from our model, we argue that the value of these letters depends on who reads them.