infer the productivity of applicants who belong to networks of incumbent workers. The model predicts that referred workers earn more and have higher unobservable abilities than nonreferred workers conditional on observable abilities.<sup>6</sup> Hensvik and Skans (2016) provide empirical evidence supporting the predictions. Although the model of Montgomery (1991) does not have a prediction about wage growth since a worker lives for one period, we straightforwardly expect that wage growth is higher for referred workers since they have better abilities on average.

Another seminal paper is Simon and Warner (1992). Although their framework, applying Jovanovic’s (1979) matching model, is different from Montgomery (1991), they essentially assume the same role of social networks: social networks reduce the ex ante uncertainty about match quality. Since their model is dynamic, they have predictions about turnover and wage growth, which Montgomery (1991) does not have. The settings are the following: Infinitely-lived workers meet employers through either social networks or open markets; workers are homogeneous in the sense that their firm-specific productivity, or job-match quality, is independently and identically distributed; the productivity is ex post observable but is ex ante only partially observable with noise to both workers and employers; wages can be renegotiated, and workers can quit jobs; lastly, the role of social networks is modeled as that the noise is smaller when workers and employers meet through social networks than when they meet in open markets. In an equilibrium, entry wage is set equal to the expected productivity, and subsequent wage is equal to the actual productivity. The predictions are the following: (i) Entry wages are higher for those who find jobs through social networks than those who find them through open channels. (ii) Wage growth of nonreferred workers is higher. (iii) Referred workers have lower turnover than nonreferred ones.<sup>7</sup><sup>_,_8</sup> Brown et al. (2016) and Dustmann et al. (2016) obtain empirical results aligning with these predictions. The predictions under

> 6The original paper does not explicitly state the prediction about unobservable abilities, however.

> 7The reason for prediction (i) is that the nonreferred, whose productivity is less revealed at hire, have the option to quit jobs if their firm-specific productivity turns out low while they can enjoy high wage if the productivity turns out high. The reason for prediction (ii) is the following: wages from the subsequent period are set exactly equal to the true productivity, and only those whose productivity is higher than an identical threshold irrespective of being referred or not continue to work. The reason for prediction (iii) is that the probability that actual productivity turns out higher than the threshold conditional on an initial offer being accepted is higher for the referred than the nonreferred.

> 8These predictions hold in extended versions such as Dustmann et al. (2016) and Galenianos (2013). Dustmann et al. (2016) slightly formalize the original model and confirm that the same predictions are derived. Galenianos (2013) adds heterogeneity in firm’s productivity and allows firm’s investment in reducing the ex ante uncertainty particularly when hiring through an open labor market. Even in this case, the same predictions about entry wages, wage growth, and turnover are obtained conditional on firm’s productivity. However, unconditional association between social networks use and wage can be negative.

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