Buying lottery tickets for foreign workers: Lost quota rents induced by H-1B policy

The H-1B program allows firms in the United States to temporarily hire high-skilled foreign citizens. The government restricts inflows of new H-1B workers and therefore creates potential rents typical of a quota. Importantly, however, the US allocates H-1B status by random lottery. We develop a theoretical model demonstrating that this lottery creates a negative externality that destroys quota rents by incentivizing firms to search for more workers than can actually be hired. Some firms specialize in hiring foreign labor and contracting out those workers’ services to third-party sites. These outsourcing firms exacerbate the search externality. Numerical exercises suggest that these processes result in an annual economic loss exceeding $10,000 per new H-1B worker hired relative to what would occur in the absence of lottery allocation.