Social Network Risk-Sharing Distortion
RCTClinical Trial
Workers embedded in informal risk-sharing networks face social obligations to direct economic opportunities toward close relatives or financial safety-net partners rather than the most qualified job candidates.
Picture this
Think of a local neighborhood pool where neighbors lend each other money during tough times. When one member gets the chance to hand out a lucrative job opening, they give it to a struggling family member in their safety net to reduce their own future burden of supporting that relative, rather than giving it to a skilled stranger who would do the job better.
What the evidence says
Over 35% of reported gifts and high-value loans occurred between relatives compared to only 2% between coworkers; unincentivized workers were 7 percentage points more likely to refer relatives (baseline <15%) than workers facing performance-contingent pay.
- Who was studied
- N = 561 male adult labor market participants in urban Kolkata, India.
- How
- Lab-in-the-field randomized controlled trial comparing fixed fee vs performance-contingent referral contracts, combined with household network surveys on financial transfers.
What to do
Decouple employee recruitment from informal social safety-net obligations by avoiding unindexed finder's fees that encourage workers to subsidize relatives.
From the source
"When individuals in our study receive performance pay, so that their finder's fee depends on their referral's performance, they become 7 percentage points less likely to refer relatives, who are more integrated into our respondents' risk-sharing networks according to the survey data."
468 Job Referrals in India AER Dec12.pdf