Why Personal Ties Cannot Be Bought?

By Casella & Hanaki (2006)
American Economic Review, Papers and Proceedings May 2006, p.p. 261-264

The unambiguous message of our model is that networking transmits information effectively only if its cost is low. When networking is free, it is preferred to signaling by both firms and workers almost without exception. But it is never a very precise mechanism, and if its cost is higher, firms’ hiring decisions interact with workers’ selfselection preventing endogenous improvements in precision. At high cost, signaling transmits information more accurately and supplants networking completely. We are somewhat surprised to conclude in qualified support of the sociologists’ position: networks work best when they are unintentional, and thus free by-products of people’s social life: ethnic, religious, family networks. In this case, they are extremely difficult to substitute with a market mechanism. Nor is it easy to mimic these spontaneous network through the intentional, and thus costly, creation of personal ties, because such action distorts, as opposed to favoring, the transmission of information. If ties are costly, market mechanisms are superior.

Paper here