Ethics of Sorting Talent on Wall Street

Competition necessitates sorting of talent into varying employment opportunities. While labor economics traditionally focuses on economic gains in explaining talent sorting in the market and the subsequent quality of the match between the employee and the employer, more recent theoretical work and empirical evidence call for examining the ethics of sorting talent as well. In this respect, intuition and theory suggest that more ethical talent will be sorted into more ethical employment opportunities and that less ethical talent (i.e., “bad apples”) will be sorted into less ethical employment opportunities (i.e., “bad barrels”), a positive sorting expectation - matching of the likes. To test this hypothesis, I exploit the licensing database of the U.S. securities industry’s self-regulatory authority to build a unique dataset of the careers of 10,000 U.S. stockbrokers, including information on their employers as well as instances of misconduct. Using two-way fixed effects models, I find support for negative,...