Hiring the right workers is one of the most important and difficult problems that a firm faces. Job testing has the potential to both improve information about the quality of candidates and to reduce agency problems between firms and human resource (HR) managers.
The paper by Hoffman, Kahn and Li examines whether and how firms should adopt job testing technologies. If hiring managers have other sources of information about a worker’s quality (e.g. interviews), then firms may want to allow managers to overrule test recommendations for candidates they believe show promise. Yet if firms are concerned that managers are biased or have misaligned objectives, it may be optimal to impose hiring rules even if this means ignoring potentially valuable soft information.
By using a unique personnel dataset on HR managers, job applicants and hired workers across 15 firms, the main result is that testing improves the match-quality of hired workers. A second result is that managers exercise discretion because they are biased or have poor judgement, not because they are better informed.
The authors provide new evidence that managers systematically make hiring decisions that are not in the interest of the firm. Additionally they show that job testing can improve hiring outcomes not simply by providing more information, but by making information verifiable, and thereby expanding the scope for contractual solutions to agency problems within the firm.
Reference: Hoffman, M., Kahn, L. B., & Li, D. (2017). Discretion in hiring. The Quarterly Journal of Economics, 133(2), 765-800.