Hiring through referrals

An equilibrium search model of the labor market is combined with a social network. The key features are that the workers’ network transmits information about jobs and that wages and entry of firms are determined in equilibrium. In the baseline model workers are homogeneous and referrals are used to mitigate search frictions. When worker heterogeneity is added referrals also facilitate the hiring of better workers. Consistent with empirical evidence, access to referrals decreases unemployment probability and increases wages for workers while hiring through referrals yields more productive workers for firms. The aggregate matching function exhibits decreasing returns to scale. ∗I would like to thank Steven Davis, Steven Durlauf, Sanjeev Goyal, Ed Green, Philipp Kircher, Nobu Kiyotaki, Guido Menzio, Alex Monge, Theodore Papageorgiou, Nicola Persico, Andres Rodriguez, Rob Shimer, Giorgio Topa, Neil Wallace, Randy Wright and Ruilin Zhou as well as many seminar and conference participants for helpful comments and the National Science Foundation for financial support (grant SES-0922215).