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Social Networks and Job Referrals in India

Development Challenge

Finding capable staff is a common challenge for firms. Subsequently, many firms rely on social contacts both to make finding candidates easier, as well as to tap into an additional source of information about potential employees. However, it is unclear whether individuals in social networks that are formed primarily to improve risk-sharing – as is common in developing countries – have the right information to identify good job-specific matches. Also, if people in these social networks are capable of identifying good matches, will they necessarily share this information with employers? For example, there may be social norms within a network that encourage an employee to refer a poorly-qualified relative rather than the person they believe to be most qualified for the job. Are referrals through social networks actually an effective way to improve efficiency in the hiring process?

Context

This study takes place in a residential area of Kolkata, India. Many of the study participants worked in informal and casual labor markets, where employment is often temporary and uncertain. Researchers sought to create a close approximation of these conditions by offering small amounts of money for short-term tasks in an experimental setting.

Evaluation Strategy

This study examined the job referral process in a laboratory setting. A temporary laboratory was set up in Kolkata, India and a random sample of households was invited to participate through door to door solicitation. Sampled households were offered a fixed wage if they sent an adult male household member to the nearby study site. Upon arrival at the study site, individuals were asked to complete a survey on demographics, labor force participation, and social networks. In addition, the survey included two measures of cognitive ability: the Digit Span Test and Raven's Matrices. The focus of the study is a task emphasizing cognitive ability, in which participants were asked to design a set of four different “quilts." In each quilt, the participant was asked to arrange a group of colored swatches according to a set of logical rules.

At the end of the experiment, individuals were paid Rs. 135 (US$3) for their participation. They were also invited to return with a male friend or family member between 18 and 60 years of age, and were offered payment for making the reference. While everyone was asked to refer a friend who would be highly skilled at the job, payment was randomized along two dimensions: the amount of fixed pay and whether the pay could depend on the referral's performance. There were five treatment groups in total: 
Contract Fixed

Component (Rs.)

Performance

Component (Rs.)

Number

of OPs

Low
performance pay

60

0-20

116

High
performance pay

60

0-50

136

Very
low fixed pay

60

0

71

Low
fixed pay

80

0

117

High
fixed pay

100

0

122

 
When the original participants returned with their referrals, the referrals were informed that they would be paid the maximum of the range offered to them, and asked to perform the cognitive ability task and an effort task. Meanwhile, the OPs filled out a short interim survey about the process they went through in recruiting referrals.

Results and Policy Implications

Without the proper enticements, social networks provide incentives to refer less qualified workers. Firms must counterbalance these incentives in order to effectively use existing employees to improve the hiring process. 

Fixed fees vs. performance pay: The amount of the fixed fee did not impact the referral process. In contrast, when individuals were offered performance pay, they were more likely to refer a higher skilled connection - OPs in the high performance pay treatment were 8 percentage points more likely to refer coworkers and 8 percentage points less likely to refer relatives. 
 
Referral performance: Analysis of referrals' performance on the cognitive task suggests that high performing OPs were capable of selecting individuals who were themselves highly skilled. However, these high ability individuals only referred high ability people when properly incentivized, i.e. when they were offered a contract in which their own pay was indexed to the referral's performance. Referrals of high performing OPs who were randomly placed in the high stakes performance pay group scored 34.6 percentage points higher on the cognitive test. Low ability OPs, on the other hand, showed little capacity to recruit high performing referrals.

Timeline

2009