#443 2012 · Lori Beaman & Jeremy Magruder (field experiment, Kolkata casual-labor market) · Labor economics / hiring and recruitment
A Kolkata hiring experiment paid referral bonuses on the recruit's performance instead of a flat fee, and workers stopped recommending relatives
the problem
Flat referral bonuses pay for producing a body, not for vouching well
background
Firms without formal screening infrastructure lean on employee referrals to fill casual and informal jobs, on the theory that a worker knows who in their own network is actually capable. But the standard referral bonus is a flat, one-time payment for producing someone who gets hired — identical whether the new hire turns out excellent or useless. That structure asks a worker to spend their own social capital vouching for a near-stranger's competence with nothing riding on whether the vouch turns out true.
Dropping referrals isn't an option — informal labor markets like Kolkata's run on exactly the trust networks a formal, stranger-facing interview can't replicate, and firms have no other cheap way to learn who is skilled before hiring them. Beaman and Magruder built a real-money, real-network field experiment there to test what a firm could change about the referral CONTRACT itself, without giving up on referrals as a channel.
what everyone would do
The standard fix for referral nepotism is to police it after the fact — audit who gets referred, cap how many hires can be relatives, or have HR double-check credentials — all of which require the firm to already know what it cannot observe (whether a referral is actually capable) in order to catch abuse of the system.
what they saw
Beaman and Magruder saw that the problem was never a lack of information — high-ability referrers clearly knew who in their network could do the job — it was that a flat bonus gave them no reason to spend that knowledge on a near-stranger's behalf instead of a relative already owed a favor. Change what the referrer is paid FOR, and the same private information starts working for the firm instead of against it.
the move
Beaman and Magruder recruited real households into a paid experimental hiring pipeline in Kolkata, then had each initial participant refer a friend or relative for the same paid task under one of five randomized contracts — some paying a flat fee regardless of the referral's performance, others paying a fixed fee plus a bonus scaled to how well the referred person actually did on the job. Under performance-contingent contracts, referrers were 7 percentage points less likely to refer a relative and 8 percentage points more likely to refer a coworker than under flat-fee contracts; varying the size of the flat fee alone changed nothing.
why it works
A flat referral fee pays a worker for producing a person who gets hired, so the rational move is to refer whoever is easiest to recruit — typically a relative — regardless of ability, since the referrer's payoff never depended on how the hire performed. Making part of the bonus contingent on the referral's actual on-the-job performance put the referrer's payoff on the same side of the table as the firm's: recommending the most capable person you know now pays more than recommending your cousin. Because only high-ability referrers actually possessed accurate information about who in their network could do the job well, the effect showed up almost entirely among them — the contract change activated real private information that flat pay had left unused.
the payoff
Referrals made under performance-contingent pay outperformed those made under flat fees, but only among referrers who were themselves high-ability: those participants started acting on information about who in their network was genuinely skilled once it paid them to, and their referrals' quality rose accordingly. Low-ability referrers showed little capacity to identify strong candidates under any contract — the incentive redesign fixed a willingness problem, not a knowledge problem, and only where accurate knowledge already existed.
where it breaks
The mechanism only works when referrers genuinely hold private information about candidates' ability that the firm has no cheaper way to get — it does nothing for low-ability referrers who cannot tell good candidates from bad regardless of what they're paid, and the experiment found that adjusting the flat-fee AMOUNT alone, without adding performance contingency, changed nobody's referral behavior. It also requires the firm to be able to measure the new hire's performance reliably and soon enough to actually pay the contingent bonus; a firm without a trustworthy performance signal cannot use this lever at all.
what came after
The paper is a foundational citation in the economics-of-referrals literature — summarized in Ashraf and Bandiera's 2018 Annual Review of Economics survey of social incentives in organizations — and J-PAL cites it in its own policy guidance for firms in developing-country labor markets as evidence that redesigning a referral bonus's payout structure can substitute for a costlier, harder-to-run employee-screening process.
references
- [1]Leveraging Social Networks for Job Referrals in IndiaAbdul Latif Jameel Poverty Action Lab (J-PAL), MIT, 2012povertyactionlab.org
- [2]Who Gets the Job Referral? Evidence from a Social Networks ExperimentAmerican Economic Review, American Economic Association, 2012aeaweb.org