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Stochastic Appraisal: A Theory with an Application to Random Favouritism

Author

Listed:
  • DEY, OINDRILA
  • BANERJEE, SWAPNENDU

Abstract

The paper identifies conditions under which incorporating stochasticity while providing appraisal to agents emerges as an optimal outcome within an organization. Using a moral hazard framework with limited liability it is shown that if provision of appraisal is made stochastic then the principal can do better vis-a-vis the standard case, provided payoff of the principal is sufficiently small. An application of the model provides game theoretic foundation behind the emergence of random favouritism. If the group size is small and /or when the return of the firm is low, preferring an agent randomly from the principal's favoured group can be optimal.

Suggested Citation

  • Dey, Oindrila & Banerjee, Swapnendu, 2016. "Stochastic Appraisal: A Theory with an Application to Random Favouritism," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 51(1), pages 83-103.
    • Handle: RePEc:dse:indecr:0112
    as

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    More about this item

    Keywords

    Stochastic; Moral Hazard; Status-incentives; Favouritism; Optimal Contract;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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