Rules Rather than Discretion: Teacher Hiring and Rent Extraction

Because of data limitations, there is little empirical research on how firms conduct hiring and the merits of different recruitment strategies. In this paper, I take advantage of a unique setting that allows me to compare the quality (value-added to student achievement) of the teachers hired in a discretionary proce3ss led by the teachers' union in Mexico with those hired on the basis of a screening rule. My results show that the teachers' union selects applicants of a considerably lower quality than those selected using a standardized test, despite the fact that the test has no power to predict teacher quality. I find evidence that the results are not explained by the self-selection of high-quality teachers to follow the test-based process. The combination of these results indicates that the teachers selected through the discretionary process are from the bottom of the distribution of applicant quality. My analysis also reveals that joint committees of state officials and union representatives allocate teachers hired in this way to schools in more "desirable" localities, but with similar pre-treatment trends in outcomes. Findings are consistent with standard models of rent extraction.