Externalities in recruiting

According to the previous literature on hiring, firms face a trade-off when deciding on external recruiting: From an incentive perspective, external recruiting is harmful since admission of external candidates reduces internal workers’ career incentives. However, if external workers have high abilities hiring from outside is beneficial to improve job assignment. In our model, external workers do not have superior abilities. We show that external hiring can be profitable from a pure incentive perspective. By opening its career system, a firm decreases the incentives of its low-ability workers. The incentives of high-ability workers can increase from a homogenization of the pool of applicants. Whenever this effect dominates, a firm prefers to admit external applicants. If vacancies arise simultaneously, firms face a coordination problem when setting wages. If firms serve the same product market, weaker firms use external recruiting and their wage policy to offset their competitive disadvantage. -- Contest ; externalities ; recruiting ; wage policy