A Moral Hazard Approach to Wage Discounts under Informal Hiring

This paper discusses the use of informal channels in hiring processes in terms of a standard principal-agent model. We have developed an adverse selection model of the labor market where effort is not contractible and employers have the opportunity to use their group of friends to hire workers. This standard framework enables us to provide an effort-based explanation of the wage gap associated to informal hiring. According to this, low ability friends take advantage of the abundance of high ability workers in the group of friends in the sense that the latter exert low effort