This paper discusses the corruptive action widespread in the organizations’ worker recruiting: favoritism and bribery. The managers of the firm are actually able to discern the type of the productivity of the job-seekers, but they utilize the information advantage through the two types of misconduct—favoritism and bribery, at the expense of the profit share of the principal (the owner) and the workers’ wage rent. The key conclusion is drawn from this paper as follows: neither the intensity of favoritism nor the wage level matters in determining whether there’s profit or loss in the firm, whereas the key variable is the relative situation of exterior labor market.
Modern firms usually separate the management right from the ownership, which causes the principal-agent problem due to the hidden action by the managers. In detail, the owners of firms usually delegate most daily operations, such as employee recruiting, to management [
Besides active signaling, the workers will also try to get favor from the manager to be hired, especially from those managers in charge of high-waged firms. What the candidates and the manager will do is an interest topic studied in many literatures (Breaugh J. A. & Mary Starke [
The function of social network in helping workers to be hired has been studied in some papers (Mark Grannovetter, 1988 [
1) The managers know the productivity of all candidates and the degree of social ties with him, and decide whether to hire a candidate or not based on the sign of the marginal contribution of the utility to the manager.
2) The manager’s marginal utility consists of three parts: the marginal profit fraction contribution of the workers, the bribery and the marginal utility increase or decrease derived from conducting favoritism towards workers.
3) Two variables―the altruistic factor a and the closeness of social ties η are introduced to measure the intensity of favoritism, unlike the case where the only variable η is parameterized as the intensity of the supervisor’s preference for the workers (Prendergast & Robert H. Topel, 1996 [
This paper discusses the corruptive action widespread in the organizations’ worker recruiting: favoritism and bribery. And the main text will be organized with three parts: firstly the brief discussion on the method, secondly the construction of the model and finally the conclusion. The basic logic is that the managers of the firm utilize the information advantage through the two types of misconduct―favoritism and bribery, at the expense of the profit share of the principal (the owner) and the workers’ wage rent. The key conclusion is drawn: neither the intensity of favoritism nor the wage level matters in determining whether there’s profit or loss in the firm, whereas the key variable is the relative situation of exterior labor market.
Assume the principal (the only owner of the firm) delegates the labor recruiting to the only manager. The manager can discern the capability (productivity) c of candidates one by one for sure. He is a selfish “altruist”, meaning that he receives the bribery and conducts favoritism merely to increase his own utility and finally maximizes his own total utility at the expense of the owner’s profit share and the workers’ wage rent. Assume the owner of the firm only knows that the social ties with the manager η and the capabilities c in terms of the monetary value produced by the workers specifically in the firm if they are employed, distribute continuously and uniformly on the rectangular
Among the three parties―the owner, the manager and the workers searching job in the firm, the manager is the most active player of them, thus, the model should start from the maximization of the manager’s utility under the constraint of the owner and workers.
Suppose that the preference of the manager is separable and additive and he is risk neutral. As is mentioned above, the manager’s marginal utility which is defined as the second order mixed derivatives of the total utility with respect to the social ties η and the capabilities c, i.e.,
Here the capability c and wage w can be regarded as the present value just at the date of contracting between the manager and the owner, the time preference has not been taken into consideration, i.e., the utility discount factor is assumed to be 1.
For the workers with capability c, had he been employed outside the firm, he would have been paid at most qc, thus the inequality
Then the above marginal utility function in Equation (1) can be rewritten as
For
The owner’s decision is to choose a proper incentive factor α to maximize his residue―the 1 − α fraction of the firm’s profit. What complicates the contract is that the manager is strongly motivated to make profit loss to increase his own total utility by receiving bribery and favoring the preferred workers and recruiting the low productive workers whose
For a given
i.e.,
Now denote the set on the left of the “
The workers in the set Ω will be chosen by the manager. Moreover, the incentive factor α chosen by the owner, the altruistic factor a and the parameter q will also influence Ω, which determines who will be hired and what amount of bribery must be paid to the manager. The key of classification of Ω is the positional relation of the hyperbola and the rectangular.
Denote the residual of the owner by
Before classifying Ω and corresponding residual function of the owner according to the value of a and q, it’s necessary to propose and prove the following lemma.
Lemma 1. Suppose that
If
If
Proof. Denote
Thus
Finally Equation (6) and Equation (7) are obtained. Q.E.D.
Now classify Ω according to the value of a and then reclassify the subclass according to the value of q.
1) If a = 0, then reclassify q into the two subclasses:
Then
If
It follows that:
2) If
For any
But for
It follows that:
3) If
boundary of R. The intersection is the only point
means that all of the workers in the set R will be hired by the manager, the same as
possible, it must be
subclasses:
a) For
then
But if
Denote
then
then
which means
b) For
If
i.e.
Then by Lemma 1,
thus
But if
For c)
i.e.
By Lemma 1,
Then we get
4)
a) For
If
If
b) For
c) For
Based on Equations (9)-(23) except (11) and (15), it is not difficult to generalize the results as the following proposition.
Proposition. Whenever the owner can’t prevent the manager from conducting favoritism and receiving bribery from workers, it follows that
1) If
2) If
3) If
The intuition behind the proposition is not always clear. In the case of
rectangular R and the half hyperbola
the loss made by the former exceeds the profit made by the latter. But in the case of
the same results is not so intuitive. As the manager rejects the most productive (whose c are close to or equal to
In the case of
The positive profit of state-owned enterprises caused by small q may conceal the corruption in the process of hiring workers, but as exterior labor market boom, i.e., q increase, workers with highest productivity tend to find job directly in the labor market since they are paid more, while the workers with low productivity tend to use bribery and the Guanxi to get employed in the public sector, finally, big loss will appear and the corruption hidden in the boom will be exposed. However, in the market monopolized by the state owned enterprises, the enterprises can increase the price of its product and therefore decrease the level of q to earn positive profit, for the productivity c is measured in terms of the monetary value produced by each worker. As a result, the situation of making profit or loss can’t be altered by merely changing the wage level or reassign the manager with different intensity of favoritism, since the sign of the residual is unrelated to the wage level and intensity of favoritism a. Thus the usual resort to make up the deficits and get surpluses by the state owned enterprises is to increase the output price.
When
Generally, it’s difficult to use the traditional first order condition to determine the optimal α for the intricacy of the residual function
The simplified model in this article characterizes the games among the explicit three parties in the process of recruiting. In the game, the principal (the owner of the firm) is informed of the distribution of workers’ productivity and social ties with the manager and exterior condition of the labor market. He is also aware of the intensity of the manager’s favoritism toward workers, but he can’t discern the workers one by one in terms of productivity and their Guanxi with the manager. The manager is assumed to be fully informed of the condition of the workers and the situation of exterior labor market, and what’s more, he possesses the talent for recruiting the workers, and thus he can utilize the advantage of information and specialization to serve his interest at the expense of the owner’s profit fraction and the worker’s wage rent. The workers are most passive among the three parties, and they can only choose to be hired or not. Their wage rent is fully deprived, if the favoritism received from the manager is small enough.
Besides the third explicit parties involving in the recruiting, the implicit party―the exterior labor market plays the key role in the decision and interest of the manager and the owner, and the fate of the incentive contract. As for monopoly firms, the managers are able to increase the price level of its output to comparatively worsen the situation of the exterior labor market to attract enough numbers of highly productive workers to hedge the loss incurred by low productive workers who enjoy social ties with the manager and pay the corresponding bribery with the amount just equal to their wage rent. The key conclusion in this article is that it’s just the q, which measures the related situation of exterior labor market, determining whether the firm makes positive or negative profit, not the wage level or the intensity of favoritism of the manager, for they only impact the absolute value of the profit or loss.
The article starts from the analysis of the model from the marginal utility and then determines the set of workers to be hired and corresponding bribery amount, unlike most other models starting from the function of total utility of the agent with constraint independent of the preference. The target function has great difficulty in further analysis, but through the lemma, the most important qualitative result has been obtained. The main obstacle to further analysis is mathematical. In fact, many aspects, such as randomization of the manager’s intensity of favoritism, the possible prevention of bribery or favoritism, comparison of results with those without bribery, multi-period consideration and reputation of the manager, may be incorporated into the model. However, any direction of the extension will complicate the models and cause it tougher.