Employee recruiting and the Lake Wobegon effect

Employers, educational institutions, and other organizations are often faced with the problem of selecting the most qualified candidate to fill an available position. To this end, many employers have adopted a tournament-like procedure consisting of an initial phase in which third-party "referees" are used to eliminate unqualified candidates, followed by an interview phase in which the remaining candidates are ordinally ranked. We show that the unique equilibrium arising under this mechanism entails embellishment by both candidates and referees (a phenomenon known as the "Lake Wobegon effect"), but despite this, always results in the selection of the most qualified candidate.