Referrals and information flow in networks increase discrimination: A laboratory experiment

Abstract

Referrals and information flow distort market mechanisms of hiring in the labor market, but they might assist employers under asymmetric information in finding better alternatives. This paper investigates whether an impartial information flow between employers in a cyclic network structure could generate more discrimination than when no information is exchanged between employers. We set up an artificial labor market in which there was no average quality difference between two categories of workers. We asked participants to play the role of employers and examined the partiality of their hiring choices. Results showed that discrimination was prevalent in all conditions. Higher standards by the employers for the quality of workers increased discrimination as did the presence of referrals from workers. Unexpectedly, impartial information flow in a cyclic network of employers did not help to decrease discrimination. We also showed that these mechanisms interact with and subdue each other in complex ways.