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Endogenous favouritism with status incentives: A model of optimum inefficiency

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  • Dey, Oindrila
  • Banerjee, Swapnendu

Abstract

The paper identifies conditions under which ‘inefficient’ favouritism emerges as an optimal outcome even when the principal do not exhibit ex-ante preferential bias for any particular agent. We characterize how the optimal incentive scheme is influenced in the presence of status incentives. Using a moral hazard framework with limited liability in a multi-agent framework, it is shown that in presence of higher valuation for status incentive inefficient favouritism is more likely to dominate over fairness. Moreover, inefficient favouritism emerges as the optimal outcome when revenue of the firm is sufficient low.

Suggested Citation

  • Dey, Oindrila & Banerjee, Swapnendu, 2015. "Endogenous favouritism with status incentives: A model of optimum inefficiency," MPRA Paper 62828, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:62828
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    File URL: https://mpra.ub.uni-muenchen.de/62828/1/MPRA_paper_62828.pdf
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    References listed on IDEAS

    as
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    6. Berger, Johannes & Herbertz, Claus & Sliwka, Dirk, 2011. "Managerial Incentives and Favoritism in Promotion Decisions: Theory and Field Evidence," IZA Discussion Papers 5543, Institute of Labor Economics (IZA).
    7. Emmanuelle Auriol & Régis Renault, 2008. "Status and incentives," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 305-326, March.
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    9. Fliessbach, Klaus & Weber, Bernd & Trautner, P. & Dohmen, Thomas J. & Sunde, Uwe & Elger, C. E. & Falk, Armin, 2007. "Social comparison affects reward-related brain activity in the human ventral striatum," Munich Reprints in Economics 20362, University of Munich, Department of Economics.
    10. Breuer, Kathrin & Nieken, Petra & Sliwka, Dirk, 2010. "Social Ties and Subjective Performance Evaluations: An Empirical Investigation," IZA Discussion Papers 4913, Institute of Labor Economics (IZA).
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    12. Prendergast, Canice & Topel, Robert, 1993. "Discretion and bias in performance evaluation," European Economic Review, Elsevier, vol. 37(2-3), pages 355-365, April.
    13. Laband, David N & Piette, Michael J, 1994. "Favoritism versus Search for Good Papers: Empirical Evidence Regarding the Behavior of Journal Editors," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 194-203, February.
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    Cited by:

    1. Jiancai Pi, 2021. "An investigation of seeming favoritism in public procurement," Manchester School, University of Manchester, vol. 89(1), pages 128-137, January.

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    More about this item

    Keywords

    Favouritism; status-incentives; principal-agent; moral hazard; 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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