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Why Do Firms Hire Using Referrals? Evidence from Bangladeshi Garment Factories

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  • Rachel Heath

Abstract

I argue that firms use referrals from current workers to mitigate a moral hazard problem. I develop a model in which referrals relax a limited liability constraint by allowing the firm to punish the referral provider if the recipient has low output. I test the model’s predictions using household survey data that I collected in Bangladesh. I can control for correlated wage shocks within a network and correlated unobserved type between the recipient and provider. I reject the testable implications of models in which referrals help firms select unobservably good workers or are solely a nonwage benefit to providers.

Suggested Citation

  • Rachel Heath, 2018. "Why Do Firms Hire Using Referrals? Evidence from Bangladeshi Garment Factories," Journal of Political Economy, University of Chicago Press, vol. 126(4), pages 1691-1746.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/697903
    DOI: 10.1086/697903
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