The HR department is trying to fill a vacant position for a job with a small tal

Question

The HR department is trying to fill a vacant position for a job with a small talent pool. Valid applications arrive every week or so, and the applicants all seem to bring different levels of expertise. For each applicant, the HR manager gathers information by trying to verify various claims on resumes, but some doubt about f it always lingers when a decision to hire or not is to be made. What are the Type I and II decision error costs? Which decision error is more likely to be discovered by the CEO? How does this affect the HR manager's hiring decisions?

Explanation / Answer

Principal-agent problem is what the HR manager is talking about. This arises when the principal (owner) is unaware whether the agent (manager) will work or shirk after hiring, primarily because it cannot monitor the behaviour of the manager. Because managers like to earn income by working and simultaneously consume leisure, the less time they devote to leisure, the more time they can spend on the job. The essence of the principal-agent problem is that the owners are not aware about the hidden behavior of the agents.

The two type of errors will be:

Because of this, the applicants will provide signals. Signaling in job market includes proxy measures like college grades, years of education. These signals is an observable indicator of some hidden characteristic. Thus, signaling attempts to transmit valuable information from the side of job-seekers to job-givers so that more productive workers can find better placement than less-productive workers.

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