Social Network Risk-Sharing Distortion

In Simple Words

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.

Research question

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.

Participants

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

Study Design

Lab-in-the-field randomized controlled trial comparing fixed fee vs performance-contingent referral contracts, combined with household network surveys on financial transfers.

Results

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.

Takeaway

Decouple employee recruitment from informal social safety-net obligations by avoiding unindexed finder's fees that encourage workers to subsidize relatives.

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 →

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