The Value of Hiring through Referrals
Employee referrals are a very common means by which firms hire new workers. Past work suggests that workers hired via referrals often perform better than non-referred workers, but we have little understanding as to why. In this paper, we demonstrate that this is primarily because referrals allow firms to select workers better-suited for particular jobs. To test our model, we use novel and detailed productivity and survey data from nine large firms in three industries: call-centers, trucking, and high-tech (software). Referred workers are 10-30% less likely to quit and have substantially higher performance on rare "high-impact metrics" (e.g. creating patents and avoiding truck accidents), despite having similar characteristics and similar performance on non-rare metrics. To identify the source of these behavioral differences, we develop four new statistical tests, all of which indicate that firms benefit from referrals predominantly by selecting workers with a better fit for the job, as opposed to referrals selecting workers with higher overall quality; to referrals enabling monitoring or coaching; or to it being more enjoyable to work with friends. We document that workers refer others like themselves, not only in characteristics but in behavior (e.g. unsafe workers refer other unsafe workers), suggesting that firms may gain by incentivizing referrals most from their highest quality workers. Referred workers achieve substantially higher profits per worker and the difference is driven by referrals from high productivity workers.
|Date of creation:||May 2013|
|Contact details of provider:|| Postal: IZA, P.O. Box 7240, D-53072 Bonn, Germany|
Phone: +49 228 3894 223
Fax: +49 228 3894 180
Web page: http://www.iza.org
|Order Information:|| Postal: IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mitchell Hoffman, 2014. "Training Contracts, Worker Overconfidence, and the Provision of Firm-Sponsored General Training," 2014 Meeting Papers 203, Society for Economic Dynamics.
- Manuel Trajtenberg, 1990. "A Penny for Your Quotes: Patent Citations and the Value of Innovations," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 172-187, Spring.
- Ernesto Dal Bó & Frederico Finan & Martín A. Rossi, 2013.
"Strengthening State Capabilities: The Role of Financial Incentives in the Call to Public Service,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 128(3), pages 1169-1218.
- Dal Bó, Ernesto & Finan, Frederico S. & Rossi, Martín A., 2012. "Strengthening State Capabilities: The Role of Financial Incentives in the Call to Public Service," IZA Discussion Papers 6645, Institute for the Study of Labor (IZA).
- Ernesto Dal Bó & Frederico Finan & Martín Rossi, 2012. "Strengthening State Capabilities: The Role of Financial Incentives in the Call to Public Service," NBER Working Papers 18156, National Bureau of Economic Research, Inc.
- Rustichini, Aldo & DeYoung, Colin G. & Anderson, Jon E. & Burks, Stephen V., 2012. "Toward the Integration of Personality Theory and Decision Theory in the Explanation of Economic and Health Behavior," IZA Discussion Papers 6750, Institute for the Study of Labor (IZA).
- David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 443-478.