Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Bergen, Department of Economics

No 04/13: EMPLOYEE REFERRAL, SOCIAL PROXIMITY AND WORKER DISCIPLINE: THEORY AND EVIDENCE FROM INDIA

Amrita Dhillon (), Vegard Iversen () and Gaute Torsvik ()
Additional contact information
Amrita Dhillon: Department of Economics, University of Warwik, Postal: The University of Warwick, Coventry CV4 7AL, UK
Vegard Iversen: Department of Economics, University of Manchester, Postal: The University of Manchester, Oxford Road, Manchester M13 9PL , UK,
Gaute Torsvik: Department of Economics, University of Bergen, Postal: Department of Economics, Fosswinckelsgate 14, Postboks 7802 , NO-5020 BERGEN

Abstract: We study an important mechanism underlying employee referrals into informal low skilled jobs in developing countries. Employers can exploit social preferences between employee referees and potential workers to improve discipline. The profitability of using referrals increases with referee stakes in the firm, and, in most cases, with the strength of the social tie between the referee and the new recruit. We provide an empirical counterpart to these results using primary data covering low- and unskilled migrants in India. Consistent with the theoretical predictions, we find a high prevalence of workplace referral and strong kinship ties between referees and new recruits. Finally, workplace intermediaries are different from and typically in more ‘prestigious’ jobs than those recruited.

Keywords: networks; low- and unskilled jobs; India; moral hazard; employee referrals; efficiency wages; referee incentives; strength of ties

JEL-codes: D82; D86; J31; J41; O12; O17

41 pages, June 12, 2013

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