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Working for References

  • Samuel Häfner
  • Curtis R. Taylor
American Economic Journal: Microeconomics
vol. 15, no. 3, August 2023
(pp. 33-77)
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Abstract

We analyze the incentive and welfare consequences of job references in a large economy marked by moral hazard, limited liability, exogenous job separation, and structural unemployment. In the firm-optimal equilibrium, employers provide references whenever production is successful, and workers holding references are hired with certainty in the ensuing period. Compared to a setting without references: the bonus-contract offers are lower, yet the workers' equilibrium effort is higher. Profits and welfare are higher, yet aggregate worker welfare is lower. Also, firms do not fully internalize the incentive effect of references and could typically increase profits and welfare by jointly raising bonuses.

Citation

Häfner, Samuel, and Curtis R. Taylor. 2023. "Working for References." American Economic Journal: Microeconomics, 15 (3): 33-77. DOI: 10.1257/mic.20210299

Additional Materials

JEL Classification

  • D82 Asymmetric and Private Information; Mechanism Design
  • D86 Economics of Contract: Theory
  • E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
  • J33 Compensation Packages; Payment Methods
  • J41 Labor Contracts
  • L25 Firm Performance: Size, Diversification, and Scope
  • M51 Personnel Economics: Firm Employment Decisions; Promotions
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