Status, incentives and random favouritism

Dey, Oindrila and Banerjee, Swapnendu (2013): Status, incentives and random favouritism.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Favouritism, status-incentives, non-verifiability, moral hazard, optimal contract
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: Theory; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L14 - Transactional Relationships ; Contracts and Reputation ; Networks; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L20 - General

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