Informal Hiring Patterns with Endogenous Job Contacts

I model informal hiring in a constant returns to scale, single-firm industry. Applications are accepted when the relative gain from high quality exceeds the low-quality odds. Informal applications provide two sources of information: noisy signalling through the endogenous arrival probability of applications, and an exogenous report conveyed directly by the application. I find the informal channel may be used in equilibrium to signal quality, improve connection between potential workers and the firm, or may not be used at all due to insufficient benefit, social norms, or incompatible incentives. I find complementarity between the report screening power and the quality composition of applicants. When used alone, the informal channel endogenously generates a favourable applicant pool, with or without homophily effects in referrals. With formal hiring present, an unfavourable informal applicant pool is also possible, as is sometimes noted empirically. Formal hiring generally affects the informal channel adversely, and may shut it down. Existence of equilibria and comparative static results are sensitive to the informal arrival cost specification. Introducing a more explicit networking scenario, I provide networking cost conditions for use of informal hiring in equilibrium. When networking costs increase, any bias in the quality composition of informal applicants is intensified. I find non-monotonic parameter effects on the informal pool composition and profits. My results highlight how informal hiring patterns and equilibrium outcomes depend on the costliness and informativeness of job contacts, and are affected by the firm's quality needs and its ability to discern quality through formal versus informal sources.