Conferences at Department of Economics, University of Toronto, RCEF 2012: Cities, Open Economies, and Public Policy

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Team transfers as a mechanism to mitigate adverse selection in employee poaching

Brian R. L. Coulter

Last modified: 2012-07-13

Abstract


Firms that poach employees often hire entire teams, rather than simply choosing specific individuals to recruit. Why do they do this? The argument that team transfers of this sort maintain network human capital, as defined by Mailath and Postlewaite (1990) is often unsatisfactory. This is especially true in situations where the individuals work independently, such as sales teams. To complement existing research that proposes a network human capital motivation, I present a model providing an adverse selection motive for transferring large teams of individuals that better explains the movement of largely individualistic teams.

Employers generally have a more accurate estimate of the ability of the workers they employ than those outside the firm. This information asymmetry leads to an adverse selection problem for any outsider hoping to poach the best employees. The outsider wins the employees only if he/she bids more (in wages) than the incumbent employer; therefore, successfully poaching an employee is a negative signal about their ability. This is a direct application of the winner's curse. Raiding firms often have a more precise estimate of the total ability of the members of a team (at another firm), however, than of the ability of any specific individual within the team. Therefore, the winner's curse inherent in winning a bidding war for employee(s) is mitigated if the entire team is poached, rather than selected individuals. Bidding for an entire team reduces the information asymmetry, and therefore the informational rents that must be paid to the employees and incumbent employer. In this paper, I illustrate that team transfers are an optimal strategy when there is significant variability in employee ability, and the poaching firm has a higher marginal product of labour than the incumbent employer. I illustrate that team contracts dominate more traditional direct revelation mechanisms. Finally, I illustrate that team transfers are optimal only when verifiable performance indicators are noisy. Therefore, improvements in monitoring technology may eventually crowd out team transfers.


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