Networks in the traditional economy – evidence from India

There is a broad consensus among economists that social networks impact on migration and labour market outcomes. Much of the empirical literature has focused on job search and thus supply-side explanations of network effects. This paper examines a particular demand-side explanation - the use of networks as an optimal recruitment strategy. Our theory of optimal recruitment predicts a negative relationship between network use and the skill intensity of jobs, a positive association between economic activity and network use and a negative relationship between network use and pro-labour legislation. It also predicts social identity to influence network access. Developing and implementing an empirical strategy to test for these relationships, we use migration data from an all-India Employment Survey to find strong support for demand-side explanations of the role of social networks in influencing migration behaviour. The negative association to skill-intensity suggests that demand-side driven labour market failure is likely to be a particularly severe problem in developing economies.