The Economics of Being Pretty: Is there a Market Failure?

When my wife read my posting of 3 May 2013 on the “economics of being pretty”, she reacted with a single word: “nonsense”. “Firms do not hire pretty people” she went on to say. “They hire ugly ones”. Her reply was intriguing so I asked her to explain.
With an instructive tone in her voice, she said that it was “well known” that those who select candidates for new jobs tend to hire people who they perceive to be uglier than themselves. Apparently, they feel threatened by more handsome persons. She also told me that she had recently come across advice given by an employment agency in the Netherlands according to which women should wear perfume that smells like men’s perfume so as not to be perceived as competitors by women who happen to interview them.
If these claims have any grain of truth, they seem to contradict the research findings I quoted in the posting of 3 May. It cannot be simultaneously true that firms want to hire both prettier and uglier people. But on reflection, a bit of economic reasoning suggests that in fact both types of claims can be true.
This is because the “firm” is not a unitary entity. The shareholders are the principals while the directors and other staff are the agents who run the firm on behalf of the principals. Sometimes, the interests of the principals diverge from those of the agents. Principals want profit maximisation, but agents want bigger salaries and larger offices. Bigger salaries and larger offices raise operating costs which reduce the profits that are returned to shareholders.
It is possible, therefore, that a director who hires a new employee may derive more pleasure from having a pretty person working in his/her team than the loss he/she incurs from a lower bonus as a result of the fact that that pretty person is less productive than the next candidate. After all, the lower productivity of one person is distributed thinly across the firm and its effect on a single bonus is minimal. By the same token, an ugly director may suffer more from being in the same team with a pretty person than any monetary loss he/she may incur from a lower salary.
By introducing a market failure caused by the divergent interests of principal shareholders and agent directors and by assuming that such principal/agent differences are distributed evenly across firms [this is an important assumption], it is possible to provide an economically reasonable explanation of why firms hire people according to their looks rather competences without suffering punishment by the market.
I hasten to add that this reasoning does not necessarily prove the veracity of the claims about the hiring of pretty or ugly persons. It only provides a testable hypothesis which is theoretically robust. Individually rational actions do not result in collectively rational outcomes.

Phedon Nicolaides

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