How do search frictions affect firm hiring decisions? We conduct a randomized control trial among 799 private firms with an active job vacancy in Addis Ababa, Ethiopia. A random subset of these firms are provided subsidized access to a new type of employment agency, which provides additional applicants with college diplomas or degrees. In our first main finding, we show that treated firms are 17.5% more likely to fill the vacancy within one month, but the effect is not driven by hiring workers provided by the agency. Instead, having had more interactions with college educated applicants, treated firms become less optimistic about the average productivity of college graduates. Among those firms requesting a college graduate at baseline, treated firms are significantly less likely to hire a college graduate and more likely to hire a non-college educated worker. There are no significant treatment effects on worker turnover, performance, or effort for the worker hired for that vacancy. These findings demonstrate that search frictions can distort firm hiring behavior by affecting learning and belief formation about the labor market, a potentially important but understudied barrier to firm growth in low- and middle-income countries.
