A Theory of Favoritism

Abstract

Favoritism prevails in organizations that rely on subjective assessments of employee performance, and its harmful impact on the efficiency is widely recognized. This paper shows that favoritism could benefit the employer when collusion among employees becomes a serious threat in organizations. Favoritism differentiates the incentive constraints for the agents, and adequate favoritism reduces the cost for preventing collusion but excessive favoritism increases the incentive cost. JEL Classification: C72, D82 Keywords: Favoritism, Collusion, and Tournament