The Trade-Offs of Letting Local Managers Make Hiring Decisions

Letting managers have more authority over hiring decisions is becoming an increasingly common management practice among business chains worldwide, yet both theoretical and empirical evidence on its effects remains limited. Local manager hiring (LMH) refers to decentralizing hiring decisions to local business unit managers, rather than relying on the headquarters’ human resource department to make decisions. To assess the impacts of LMH on employee recruitment, productivity, and firm performance, we partnered with a large Chinese firm operating 111 retail stores through a twelve-month field experiment. Results show that LMH leads to an increase in both the mean and variance of individual productivity, yielding a boost in store-level sales of approximately 7%–8%. Store-level performance gains were driven by both the direct effects of recruiting higher-performing workers and the indirect effects of positive spillovers from new hires to existing employees. In line with our theory, LMH achieved superior outcomes in stores with better-aligned managerial incentives, more repeat customers, and lower levels of busyness. However, the rise in variance indicates greater inconsistency in hiring outcomes, which led to worse outcomes in some stores. These findings highlight the central trade-off of decentralized hiring: While it can improve average performance by leveraging local knowledge, it also increases the risk of costly hiring mistakes. This paper was accepted by Isabel Fernandez-Mateo, organizations. Funding: This work was supported by The Chiang Ching-Kuo Foundation [Grant DD086-A-18]; Stanford Center at Peking University; Stanford King Center on Global Poverty and Development. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2020.03837 .