Favoritism is the act of offering jobs, contracts and resources to members of one's social group in preference to outsiders. Favoritism is widely practiced and this motivates an exploration of its origins and economic consequences. Our main finding is that individuals have an interest to trade favors over time and that this will come at the expense of others, who are outside their group. We show that favoritism is relatively easier to sustain in smaller groups. Favoritism entails social costs as it usually leads to inefficient allocations. However, favoritism can lead to payoff advantages for larger groups. Productivity enhancing investments are larger in groups which practice favoritism. The availability of investment opportunities can reinforce payoff inequalities across groups.
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Find related papers by JEL classification: C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations J71 - Labor and Demographic Economics - - Labor Discrimination - - - Hiring and Firing O10 - Economic Development, Technological Change, and Growth - - Economic Development - - - General
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