Delegated Recruitment and Hiring Distortions

Abstract

A firm delegates search for a worker to a recruiter. Productivity is uncertain prior to hire with recruiter beliefs characterized by an expectation and variance. Delegation occurs using a refund contract which is common in the industry. We analyze how delegation in this setting shapes search behavior and the composition of hires. We demonstrate that delegation is theoretically equivalent to making the search technology less accurate. This generates inefficiency: search effort and social surplus are lower under delegation than in the first-best benchmark. We show this inefficiency is driven by moral hazard with a multitasking flavor. The recruiter wastes search effort finding low variance workers at the expense of high expectation workers. As a result, as workers become more homogeneous with respect to productivity variance, delegation becomes more efficient. Our model provides a microfoundation for variance-based statistical discrimination.