From soccer stars to legal eagles, professionals whose skills are in high demand often have their pick of the best employers. As well as considering salaries and other benefits, their choice is likely to be influenced by the quality of the team they will be joining. In a new paper supported by the TSE-SCOR ‘Risk Markets and Value Creation’ Chair, Francesca Barigozzi (University of Bologna) and Helmuth Cremer (TSE) study how a preference for talented colleagues may affect competition in the labor market.
Why might workers benefit from high-quality colleagues?
Working with top professionals may improve access to resources, opportunities, and general perks inside and outside the organization. If high-ability workers improve profits which are at least partially shared with all employees, other workers can benefit financially. Top professionals may also bring social status and reputation to the organization and their colleagues, as well as increasing workers’ career prospects outside the firm. Future employers are likely to have a favorable view of job candidates previously employed by firms with high-quality workers. There may also be benefits from complementarities and spillovers in productivity.
How does your paper study the impact of these peer effects?
Economists have traditionally focused on job decisions based on applicants’ preferences for the organization, and the associated monetary compensation. Our innovation lies in the assumption that workers’ choices are also influenced by their concern for coworkers’ ability (CfCA). We propose that an organization becomes more attractive as it hires more “star” employees.
In our model, we consider two firms that differ in their marginal productivity and use nonlinear contracts to compete for workers with varying ability levels and preferences. High-ability workers prefer the firm that attracts the best workers.
We analyze the impact of these peer effects on competition to attract the best talents. How does CfCA shape nonlinear contracts and workers’ sorting between competing firms? How does workers’ private information on ability affect workers’ sorting?
What are your main findings?
We find that CfCA matters. We first study a scenario in which workers’ ability is observable, but their preference for firms is not. Imagine a job market for “senior” candidates whose previous performance – for example, a lawyer’s successful cases or a researcher’s publications – can be observed by firms.
In this context, the more productive firm hires a larger share of high-ability workers and, to a lesser extent, a larger share of low-ability workers. As a result, this firm always hires a more capable workforce. Here, CfCA increases total surplus and the benefits for top workers but reduces both firms’ profits. Intuitively, CfCA increases competition for skilled workers by reducing mismatch disutility – that is, the cost to candidates of choosing an unsuitable job – and is thus detrimental to firms. If CfCA is sufficiently large, the more productive firm hires all high-ability workers.
Assuming firms are not identical, workers’ sorting is always inefficient. Three distortions arise, each resulting in the least efficient firm employing too many workers. The first is caused by profit maximization: firms disregard mismatch disutility of all the workers except the marginal ones. The second depends on strategic interaction: the least efficient firm competes too aggressively while the most efficient one accommodates too much. The third is generated by the failure to fully internalize the externalities caused by CfCA and strategic interaction.
We then consider screening contracts and workers’ sorting when firms cannot observe workers’ ability or preferences. This scenario corresponds to a “junior” job market in which applicants have not yet been able to prove their talent in practice. Here, we show that the market allocation is only incentive compatible when firms have similar productivities and compete for heterogenous workers with low CfCA. Otherwise, three possible regimes emerge in which skilled workers always face overincentivization, mostly from the less efficient firm. Private information on ability then erodes at least part of the surplus obtained by top workers, especially when CfCA is high. Sorting is less distorted when CfCA is low.
What might be next for research in this area?
Our paper represents an important first step in the study of peer effects in the workplace. Our model could be extended by considering performance and productivity spillovers. For instance, if top workers improve their colleagues’ productivity, this is likely to further increase the attractiveness of firms with a star-filled workforce. The reverse effect is possible if top workers reduce their coworkers’ productivity. Career concerns could also be taken into account, given that the presence of talented colleagues may reduce a worker’s chances for promotion.
KEY TAKEAWAYS
• Concern for coworkers’ ability (CfCA) tends to increase surplus and intensify competition to attract top workers. This benefits high-ability workers but is detrimental to firms.
• When ability is not observable and CfCA is low, screening contracts reduce sorting distortions. Overincentivization then erodes the benefits of CfCA for top workers, especially when CfCA is high.
• This suggests employers struggle to offer the right incentives, especially to early-career stars who benefit less from CfCA than senior talents with a well-established track record.
FURTHER READING
This article was published in the TSE-SCOR Foundation for Science Journal 5, June 2024.
‘Shining with the stars: Competition, screening, and concern for coworkers’ quality’ and other publications by Francesca and Helmuth are available to view on the TSE website and in the TSE Mag "Learning paths: the world of work".
