Endogenous Incentive-Driven Referral Participation

In Simple Words

Imagine a school offering teachers a cash bonus if a student they tutor passes an advanced exam. Teachers who know they have brilliant students will enthusiastically sign up for the bonus program, whereas teachers without strong candidates will skip the program altogether because their expected payout is low.

Research question

Employers offering performance-contingent referral contracts often do not realize that performance incentives alter not only candidate choice but also which existing employees choose to participate in referring peers.

Participants

N = 561 male labor market participants in Kolkata, India.

Study Design

Randomized controlled trial analyzing participation rates (returning with a referral) across fixed vs performance-contingent pay schemes, interacted with standardized participant cognitive scores.

Results

High-ability participants facing high-stakes performance pay were 16.2 percentage points more likely to return with a referral (p < 0.05), while low-ability participants showed no statistically significant increase in participation (3.0 percentage points, p > 0.10).

Takeaway

Deploy performance-contingent referral bonuses to self-select high-performing existing employees into the referral pipeline while reducing participation from low-performing employees.

Read alongside the research

Plain-English glossary

Original explanations, informed by the references below. Examples are illustrations, not data from the studies above. The research text stays unchanged.

Percentage points

The difference between two percentages.

ExampleA rise from 40% to 50% is 10 percentage points. Relative to the starting value, that is a 25% increase.

Office for National Statistics · Percentages ↗Read more about percentage points →

Randomized controlled trial

A study that uses chance, like drawing lots, to decide who receives each option being compared. Researchers compare the groups’ outcomes to estimate the effect of those options.

ExampleA lottery assigns volunteers to a training programme or a comparison group. Researchers then compare their outcomes.

GET-IT glossary · Randomized study ↗Read more about randomized controlled trial →

Statistically significant

A label used when a result passes a chosen statistical threshold, often p < 0.05. It does not show how large or useful an effect is. A result that is not statistically significant does not prove there is no effect.

ExampleA study reports p = 0.03 against a 0.05 threshold. It passes that test, but the effect could still be too small to matter.

American Statistical Association · Statement on p-values ↗Read more about statistically significant →

Related findings

• Dominated Penalty Contracts →Labour & employment

  A dominated contract is like giving $10 to a friend with instructions to burn it if you miss your daily study goal, without getting any extra money if you complete it. Although mathematically inferior to a standard contract, the threat of losing money creates immediate panic that overrides procrastination.

• Education-Driven Apprentice Self-Selection →Labour & employment

  Adding a monthly living stipend and a recognized classroom diploma to hands-on vocational training is like adding a full scholarship and college credit to a trade apprenticeship. This combination convinces high school graduates—who would normally hold out for office jobs—to apply for manual trade training alongside less-educated applicants.

• Intermediate Target Conditioning →Labour & employment

  Imagine paying students money every time they sit in a classroom, but offering no incentives for passing tests or completing homework. Students will show up and occupy seats to collect the reward, but sitting in a chair does not compel them to study or learn the material.

• Network Incentive Trade-Off Threshold Condition →Labour & employment

  Imagine a worker who gets a $20 social benefit (or saves $20 in financial support) by giving a job referral to a struggling relative instead of a skilled acquaintance. To get the worker to choose the skilled candidate, the employer's performance bonus must exceed that $20 benefit divided by the worker's confidence in identifying who is actually more skilled.