1. Employee Screening: Theory and Evidence Fali Huang Peter Cappelli SESS, SMU Wharton, UPenn Dec. 18, 2006

2. Introduction To elicit effort from employees when effort is difficult to observe, a firm may  screen job candidates carefully to select workers with intrinsic motivation, or  monitor employees intensively to prevent shirking. We analyze the relationship between screening and monitoring in the context of a principal-agent model, and test the theoretical results using a national sample of U.S. establishments.

3. Contributions to Related Literature  Personnel economics High-performance work practices are associated with less monitoring, but screening is often neglected in the literature. Holmstrom and Milgrom 1991; Ichniowski, Shaw, and Prennushi 1997. Cappelli and Newmark (2001).  Social Preferences Workers with higher intrinsic motivation make extra effort and receive higher wages. But this has not been tested on any national sample of firms. Gift exchange (Akerlof 1982); organization identity (Akerlof and Kranton 2005).

4. Model: Production and Monitoring  A continuum of principals and agents with equal mass.  Production function: making effort shirking Prob. of producing h p q Prob. of producing 0 1-p1-q Cost of effort c.  Making effort is socially optimal: hp-c > hq.  Monitoring: monitoring intensity: Shirking is caught by principal with prob. Total monitoring cost:

5. Heterogeneous Agents and Screening  Agents differ in conscientious levels: A cooperative type agent has conscientiousness  > 0: he feels guilty of the amount  if he shirks. A selfish type agent has zero conscientiousness.  The proportion of cooperative types is ρ ∈ (0,1).  Screening: Prob (detecting a selfish type agent) = r ∈ (0,1); Prob (detecting a cooperative type agent) = 1. Screening principal hires the 1 st agent perceived to be coop. Prob (a hired agent is cooperative type):

6. Wage and Utility The wage for an agent with is Utility function: Baseline Wage Incentive Pay Make effort if

7. Timeline Incentive package announced. Agents apply for jobs at their preferred principals. Principals screen job candidates, hire the first one perceived cooperative, rejects others. Agents consume the base wage, choose to make effort or shirk. Principals monitor, not pay incentive wage if shirking detected. ScreenEffort ChoiceMonitorMatchingPackage Choice Equilibrium: Principals max profit, Agents max utility, Market clear.

8. The Equilibrium Proposition. (1) In the equilibrium, a proportion of principals screen job candidates with intensity, while others do not screen. The optimal solution is uniquely determined, where The optimal wages are (2) Both types of agents prefer to work for screening principals. A cooperative type agent makes effort while a selfish one shirks if hired by a screening principal, while neither shirks under a non-screening principal.

9. NES97 data  The data come from establishment ‑ level surveys of employment practices conducted by the U.S. Bureau of the Census in 1997 for the National Center on the Educational Quality of the Workforce.  It is a nationally representative sample of private establishments with more than 20 employees.  It appears to be the best data available In terms of representativeness, response rate, and breadth of questions about work practices and organizational characteristics.

10. Variable Selections  The screening selectivity is measured by two variables: Candidates#: The number of candidates interviewed for the job opening of a typical production employee; about 90% of the firms interview between 2 and 10 candidates, while the mean is 7 (SD 8). Attitude Screening: The importance of a candidate’s attitude (mean 4.4 out of 5) in hiring decision, or the average of the importance of attitude and communication skills (mean 4.1).  The monitoring intensity is measured negatively by Employee-Supervisor Ratio: mean 19 (SD 21) Teamwork: Percent of production employees in teamwork (16%)

11. Control Variables Schooling for production employees Working hours per week for the production employees Computer usage (supervisors): percent using computers in their jobs Computer usage (production employees) Union ratio: percent of non-managerial, non-supervisory employees covered by a collective-bargaining agreement Months to reach job proficiency for a typical new hire Ratio of women: percent among permanent employees Minority ratio: percent among permanent employees Job rotation: percent of non managerial/supervisory employees currently involved Average employee benefits Five size dummies and 21 industry dummies

12. Teamwork.013** (.006).013** (.006).118*** (.040).108*** (.040).0019*** (.0005).003*** (.001).011*** (.003).008*** (.003) Screening Selectivity Candidates#Attitude Screening OLS (1)OLS (2) 2SLS (1) 2SLS (2) OLSProbit 2SLS (1) 2SLS (2) Employee- supervisor ratio.020** (.009).019** (.009).298*** (.112).284** (.113).0014* (.0007).0042** (.0018).022*** (.0087).019** (.0079) Screening on Work Exper. _.075 (.296) _.238 (.36) _.256*** (.051) _.173*** (.026) Screening on Acad. Perform. _ 1.08*** (.279) _.77** (.35) _.020 (.047) _.267*** (.026) Observation 20492037203120202156190221342123 R-square.044.054__.18___ F-stat in 1 st stage regression __73.349.72__10.2175.65 Table 2: The Trade-Off between Screening and Monitoring

13. Table 3: Wages and Screening Selectivity OLS (1) (2) (3) (4) (1C) (2C) (3C) (4C) Candidates#.0020** (.0008).0019** (.0008).0018** (.0008).021*** (.0073).019*** (.0073).011 (.008).015 (.010) Attitude Screening.030*** (.009).029*** (.010).35** (.14).71*** (.25) Candidates#- Residual -.02*** (.0073) -.018** (.0074) -.010 (.0084) -.014 (.010) AttitudeScreen- Residual -.32** (.14) -.68*** (.25) Screening on Work Exper..015 (.01).010 (.01).0008 (.01) -.32 (.20) Screening on Acad. Perfor..009 (.01) -.00 (.01).02* (.01) -.025 (.16) WorkExperience s-residual.32 (.20) AcademicPerfor mance-residual.036 (.16) Observation 188218761877187312411238 1237 R-square.59.54.55

14. Concluding Remarks We analyze the relationship between screening selectivity and monitoring intensity in the context of a principal-agent model and test the theoretical results using a national sample of U.S. establishments. We found a substitution relationship between screening selectivity in work ethic and monitoring intensity, and a complementary relationship between screening selectivity and high performance work practices (especially teamwork). High screening selectivity leads to high wages.