Asymmetric information in a search model with social contacts

Stupnytska Y. Asymmetric information in a search model with social contacts. Center for Mathematical Economics Working Papers. Vol 548. Bielefeld: Center for Mathematical Economics; 2015.In this paper, the search model is proposed, in which homogeneous firms are uncertain about the job seekers' number of friends, who can help them in the job search (social capital). All workers have the same productivity and differ only in the social capital. A firm offers a take-it-or-leave-it wage contract to a worker after checking the worker's profile and her public number of non-fictitious social contracts in the Social Network System in the Internet. This number serves as a noisy signal of the social capital for firms and cannot be influenced by the worker only for signalling purpose. The model generates a positive relationship between the number of contacts in the Social Network System and the wage offered by firms in the equilibrium. In addition, the presence of firm's uncertainty with respect to workers' possibilities to find jobs through social contacts increases overall social welfare

Social networks in a frictional labour market

Stupnytska Y. Social networks in a frictional labour market. Bielefeld: Universität Bielefeld; 2016.This dissertation studies the impact of social networks on social welfare and wage inequality in a labour market with search and matching frictions. Social contacts are considered in the sense of information transmission about vacancies from employed to unemployed workers (social capital). The main chapters of this thesis are based on three independent articles. Chapters 2 and 3 are joint works with J.-Prof. Dr. Anna Zaharieva. Chapter 2 is a revised version of the IMW working paper No. 491 with the same title. This paper develops a search model with heterogeneous workers and social networks. High ability workers are more productive and have a larger number of professional contacts. Firms can choose between a high cost vacancy in the regular market and a low cost job opening in the referral market. The model predicts that a larger number of social contacts is associated with a larger wage gap between high and low ability workers and a larger difference in the equilibrium unemployment rates. The net welfare gain of referrals is estimated at 1.2%. Next we demonstrate that the decentralized equilibrium with referrals is inefficient for any value of the bargaining power. There are two reasons for the inefficiency. First, the private gain from creating a job in the referral market is always below the social gain, so the equilibrium unemployment of high ability workers is above its optimum. Moreover, high ability workers congest the market for low ability workers, so the equilibrium wage inequality is inefficiently large. This is in contrast to the result of Blazquez and Jansen (2008) showing that the distribution of wages is compressed in a search model with heterogeneous workers. Finally, we show that a combination of transfers and subsidies can restore the optimal allocation. If this policy is implemented the net welfare gain of referrals rises up to 1.8%. Chapter 3 is a paper published in the Journal of Economic Behavior and Organization 119 (2015), pp. 211-233 (doi:10.1016/j.jebo.2015.08.012) with the same title. This paper presents a search model with heterogeneous workers, social networks and endogenous search intensity. There are three job search channels available to the unemployed: costly formal applications and two costless informal channels - through family and professional networks. Low productivity workers expect low wages implying low incentives for preparing formal job applications. Hence low productivity workers rely on family referrals as a method of last resort. In contrast, professional referrals are used by firms to hire high productivity employees. Formal hiring is then a most frequent employment channel for workers in the middle range of the productivity distribution. This explains a U-shape referral hiring pattern observed in empirical studies and a strong selection of workers on productivity across the three channels. Moreover, combining family and professional referrals into one informal channel may generate a spurious result of wage premiums (penalties) if high (low) productivity workers are dominating in the empirical data and their productivity is not fully observable to the econometrician. Chapter 4 is the IMW working paper No. 548 with the same title. In this paper, the search model is proposed, in which homogeneous firms are uncertain about the job seekers’ number of friends, who can help them in the job search (social capital). All workers have the same productivity and differ only in the social capital. A firm offers a take-it-or-leave-it wage contract to a worker after checking the worker’s profile and her public number of non-fictitious social contacts in the Social Network System in the Internet. This number serves as a noisy signal of the social capital for firms and cannot be influenced by the worker only for signalling purpose. The model generates a positive relationship between the number of contacts in the Social Network System and the wage offered by firms in the equilibrium. In addition, the presence of firm’s uncertainty with respect to workers’ possibilities to find jobs through social contacts increases overall social welfare

Explaining the U-Shape of the Referral Hiring Pattern in a Search Model with Heterogeneous Workers

Stupnytska Y, Zaharieva A. Explaining the U-Shape of the Referral Hiring Pattern in a Search Model with Heterogeneous Workers. Center for Mathematical Economics Working Papers. Vol 511. Bielefeld: Center for Mathematical Economics; 2014.This paper presents a search model with heterogeneous workers, social networks and endogenous search intensity. There are three job search channels available to the unemployed: costly formal applications and two costless informal channels - through family and professional networks. The gain from being employed is increasing in the productivity, so the lowest motivation for preparing formal applications is proved to be among the least productive worker types. We assume that professional contacts exhibit a strong degree of homophily, thus it is profitable for firms to direct their network search towards the more productive incumbent employees. So the probability of a professional referral is increasing in the productivity of the worker, which mitigates the incentives to use the formal channel of search. Therefore, the model predicts that workers in the right (left) tail of the productivity distribution have the highest propensity of finding a job with a help of professional (family) contacts, whereas the formal channel of search is mostly utilized by workers in the middle range of the distribution. This explains the U-shaped referral hiring pattern in the model. The endogenous sorting of workers across channels also implies that professional (family) referrals are associated with wage premiums (penalties) compared to the formal channel of search. The average effect of referrals on wages is, however, ambiguous and depends on the relative proportions of high and low productivity types in the population. These findings help to explain the contradicting empirical evidence concerning the effect of referrals on wages

Optimal policy and the role of social contacts in a search model with heterogeneous workers

Stupnytska Y, Zaharieva A. Optimal policy and the role of social contacts in a search model with heterogeneous workers. Center for Mathematical Economics Working Papers. Vol 491. Bielefeld: Center for Mathematical Economics; 2013.This paper develops a search model with heterogeneous workers and social networks. High ability workers are more productive and have a larger number of professional contacts. Firms have a choice between a high cost vacancy in the regular labour market and a low cost job opening in the referral market. In this setting the model predicts that a larger number of social contacts is associated with a larger wage gap between high and low ability workers and a larger difference in the equilibrium unemployment rates. Next we demonstrate that the decentralized equilibrium is inefficient for any value of the bargaining power. There are two reasons for the inefficiency. First, the private gain from creating a job in the referral market is always below the social gain, so the equilibrium unemployment of high ability workers is above its optimal value. Moreover, high ability workers congest the market for low ability workers, so the equilibrium wage inequality is inefficiently large. This is in contrast to the result of Blazquez and Jansen (2008) showing that the distribution of wages is compressed in a search model with heterogeneous workers. Finally, we show that a combination of taxes and subsidies can restore the optimal allocation

Explaining U-shape of the Referral Hiring Pattern in a Search Model with Heterogeneous Workers

Stupnytska Y, Zaharieva A. Explaining U-shape of the Referral Hiring Pattern in a Search Model with Heterogeneous Workers. Journal of Economic Behavior & Organization. 2015;119:211-233.This paper presents a search model with heterogeneous workers, social networks and endogenous search intensity. There are three job search channels: costly formal applications and two costless informal channels – through family and professional networks. Our model explains a U-shape referral hiring pattern observed in empirical studies and a strong selection of workers on productivity across the three channels. Moreover, combining family and professional referrals into one informal channel may generate a spurious result of wage premiums (penalties) if high (low) productivity workers are dominating in the empirical data and their productivity is not fully observable to the econometrician

Optimal Policy and the Role of Social Contacts in a Search Model with Heterogeneous Workers

Stupnytska Y, Zaharieva A. Optimal Policy and the Role of Social Contacts in a Search Model with Heterogeneous Workers. Journal of Public Economic Theory. 2017;19(5):957-985.This paper develops a search model with heterogeneous workers and social networks. High ability workers are more productive and have a larger number of professional contacts. Firms can choose between a vacancy in the regular market and a job opening in the referral market. The model predicts that a larger number of social contacts is associated with a larger wage gap between high and low ability workers and a larger difference in the unemployment rates. The net welfare gain of referrals is estimated at 1.2%. There are three reasons for the inefficiency of the decentralized equilibrium. First is the traditional search externality described by Hosios (1990). Second, firms share their profits with workers, whereas the social optimum implies that full surplus should be given to firms in the referral market. This inefficiency can be internalized by means of referral subsidies. Third, there is the ”pooling inefficiency” in the regular market. If high ability workers are sufficiently more productive they impose a positive extrenality on low ability workers and should be rewarded by positive transfers. On the contrary, if productivity differences are small, high ability workers achieve unreasonably high wages by referring each other and reduce employment chances of low ability workers. In this latter case, high ability workers should be penalized. If optimal policy is implemented the net welfare gain of referrals rises up to 1.8%