Does referral-based hiring exacerbate agency problems?

51 Pages Posted: 14 Apr 2020 Last revised: 15 Jul 2021

See all articles by Chung-Yu Hung

Chung-Yu Hung

University of Melbourne, Department of Accounting

Anne M. Lillis

University of Melbourne

Anne Wu

National Chengchi University (Taipei)

Date Written: July 12, 2020


We investigate circumstances in which referral-based hiring can exacerbate rather than mitigate agency problems. When incentive contracts cannot fully align employees’ incentives with the interests of the firm, employees may behave opportunistically. Referred job candidates likely obtain inside information from existing employees about opportunistic incentive responses and it is this information that exacerbates agency problems. Our research setting enables us to distinguish between referred and non-referred employees. It also features a context in which the incentive contract consists of two measures with different properties (efficiency and quality), which allow for opportunistic incentive responses, i.e., sacrificing quality for efficiency. We find that referred employees focus more on efficiency and less on quality than non-referred employees. We further document the persistence of this behavior and their differential departure likelihood. Our findings suggest that referral-based hiring can exacerbate agency problems when incentive contracts allow for opportunistic gains.

Keywords: employee selection, referrals, financial incentives, distorted effort allocation, multi-tasks

JEL Classification: M12, M41, M54

Suggested Citation

Hung, Chung-Yu and Lillis, Anne and Wu, Anne, Does referral-based hiring exacerbate agency problems? (July 12, 2020). Available at SSRN: or

Chung-Yu Hung (Contact Author)

University of Melbourne, Department of Accounting ( email )

198 Berkeley Street
Melbourne, Victoria 3053

Anne Lillis

University of Melbourne ( email )

Parkville, Victoria 3010

Anne Wu

National Chengchi University (Taipei) ( email )

No. 64, Chih-Nan Road
Section 2
Wenshan, Taipei 11623

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