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Status, incentives and random favouritism

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  • Dey, Oindrila
  • Banerjee, Swapnendu

Abstract

The paper identifies a condition under which favouritism is beneficial to the principal even when the favoured agent is selected randomly. This paper also characterizes how the optimal incentive scheme changes in presence of random favouritism. Using a moral hazard framework with limited liability it is shown that in presence of favouritism principal can optimally decrease monetary incentive when the potentially favoured group size is small. Inspite of a fall in optimal effort the paper predicts that favouritism can emerge as an optimal outcome when return of the firm is low.

Suggested Citation

  • Dey, Oindrila & Banerjee, Swapnendu, 2013. "Status, incentives and random favouritism," MPRA Paper 49188, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:49188
    as

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    File URL: https://mpra.ub.uni-muenchen.de/49188/1/MPRA_paper_49188.pdf
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    References listed on IDEAS

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    6. Neil Rickman & Robert Witt, 2008. "Favouritism and Financial Incentives: A Natural Experiment," Economica, London School of Economics and Political Science, vol. 75(298), pages 296-309, May.
    7. Luis Garicano & Ignacio Palacios-Huerta & Canice Prendergast, 2005. "Favoritism Under Social Pressure," The Review of Economics and Statistics, MIT Press, vol. 87(2), pages 208-216, May.
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    Cited by:

    1. Oindrila Dey & Swapnendu Banerjee, 2022. "Incentives, Status and Thereafter: A Critical Survey," South Asian Journal of Macroeconomics and Public Finance, , vol. 11(1), pages 95-115, June.
    2. Dey, Oindrila & Banerjee, Swapnendu, 2014. "Status and incentives: A critical survey," MPRA Paper 57658, University Library of Munich, Germany.

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    More about this item

    Keywords

    Favouritism; status-incentives; non-verifiability; 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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