Referral and Job Performance: Evidence from the Ghana Colonial Army

Since Granovetter.s (1974) seminal work, it is widely recognized that job referral plays an important role in the way the labor market works. There are many di¤erent types of referrals .e.g., by relatives, teachers, or previous employers. One kind of referral that has attracted the attention of economists is referral by current employees. This form of referral is thought to play two possible roles: the transmission of information that is relevant to the hiring process; and the exchange of favors between employer, referee, and new recruit. In the latter case, referral is a source of inefficiency and inequity since it distorts the recruitment process to favour friends and relatives (Barr and Oduro 2002). In the former case, referral instead plays an efficiency enhancing role: it raises the quality of the match, either by providing employers with better information about workers (Saloner 1985), or by providing workers with better information about job characteristics (Simon and Warner 1992, Mortensen and Vishwanath 1994) .Montgomery (1991) provides an elegant formalization of employee referral. In his model, referral by employees is valuable because the unobserved quality of a new worker is positively correlated with the revealed quality of the current employee providing the reference. If the current employee has proved to be of high quality, anyone referred by this employee is also more likely to be of high quality. Underlying this assumption is the idea that social ties are characterized by homophyly, and hence that characteristics of socially proximate individuals are correlated (Jackson 2008). As Montgomery shows, this assumption is sufficient to induce employers to rely on referral from high quality employees. It does, however, supposes that referees truthfully report the information at their disposal. Whether this is the case in practice is unclear.