After completing this chapter, you will be able to answer the following questions: When should I hire low wage workers over higher wage workers? Should the skills of my workers change if my firm increases its investment in capital equipment? How many workers should my firm hire? What are the strategies for hiring risky workers? Are there special considerations for hiring uncommon skills? | Chapter 1: Setting Hiring Standards 1 11/13/2014 Chapter 1: Setting Hiring Standards Risky workers example Analysis Downside risk Upside potential Termination costs Risk aversion Length of evaluation Length of employment A Counterargument Asymmetric information Firm-specific productivity Setting hiring standards Balancing benefits against costs Foreign competition The method of production How many workers to hire Other factors Availability of workers Firm financial condition Making decisions with imperfect information Make a decision independent of analysis Estimate the relevant information Experiment Summary 2 11/13/2014 Chapter 1 – Hiring Standards After completing this chapter, you will be able to answer the following questions: When should I hire low wage workers over higher wage workers? Should the skills of my workers change if my firm increases its investment in capital equipment? How many workers should my firm hire? What are the strategies for hiring risky workers? Are there | Chapter 1: Setting Hiring Standards 1 11/13/2014 Chapter 1: Setting Hiring Standards Risky workers example Analysis Downside risk Upside potential Termination costs Risk aversion Length of evaluation Length of employment A Counterargument Asymmetric information Firm-specific productivity Setting hiring standards Balancing benefits against costs Foreign competition The method of production How many workers to hire Other factors Availability of workers Firm financial condition Making decisions with imperfect information Make a decision independent of analysis Estimate the relevant information Experiment Summary 2 11/13/2014 Chapter 1 – Hiring Standards After completing this chapter, you will be able to answer the following questions: When should I hire low wage workers over higher wage workers? Should the skills of my workers change if my firm increases its investment in capital equipment? How many workers should my firm hire? What are the strategies for hiring risky workers? Are there special considerations for hiring uncommon skills? 3 11/13/2014 3 Risky Workers 11/13/2014 4 Risky Hires You have a position to fill in a London investment bank Consider two candidates salary = £100K; will work for the firm T years Gupta predictably produces £200K per year Svensen may be a “star” (50%), producing £500K; or a “lemon” (50%), losing £100K ignore discounting for simplicity assume the firm is risk neutral (is this a reasonable assumption?) They have equal expected productivity. Which is a better hire? 5 11/13/2014 Employees as Real Options Hiring risk isn’t always bad! A risky hire is a “real option” if you can limit downside risk by firing “lemons” it might pay to hire a risky candidate even if risky candidate has lower expected productivity than safe candidates the firm is risk averse termination costs are high “Hiring an Oddball” 6 Gupta Net = T•100K Svensen ½ ½ Retain for T years Fire after 1st year Net = T•400K Net = –200K ½ ½ Expected Net = (2T–1)100K 11/13/2014 .
