Connections, Referrals, and Hiring Outcomes: Evidence from an Egyptian Establishment Survey

Network-based hiring is a common form of recruitment in businesses across the world. We administered a unique survey of Egyptian retail establishments to study the use of these hiring methods. We document important differences in establishments’ use of ties to the owner (“connections”) and to employees (“referrals”) and their relationships with hiring outcomes. While all types of establishments use referrals at similar rates, use of owner connections varies widely and is most common among small informal establishments. Armed with these facts, we construct a simple model of hiring which clearly predicts that connections and referrals should have heterogeneous effects on hiring outcomes depending on establishment type. Our empirical results are consistent with the model's predictions. When high-productivity establishments use connections, the practice is associated with lower-quality hires (nepotism), yet when low-productivity establishments use connections, they find more productive workers. By contrast, referrals benefit high-productivity establishments more due to network homophily. These findings indicate that policies designed to either limit or expand network-based hiring could benefit one type of organization while having negative effects on others.