Status, Incentives and Random Favouritism

21 Pages Posted: 25 Jun 2013

See all articles by Oindrila Dey

Oindrila Dey

Jadavpur University

Swapnendu Banerjee

Jadavpur University, Department of Economics; Jadavpur University, Calcutta

Date Written: June 25, 2013

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. In spite of a fall in optimal effort the paper predicts that favouritism can emerge as an optimal outcome when return of the firm is low.

Keywords: favouritism, status-incentives, non-verifiability, moral hazard, optimal contract

JEL Classification: D86, L14, L20

Suggested Citation

Dey, Oindrila and Banerjee, Swapnendu, Status, Incentives and Random Favouritism (June 25, 2013). Available at SSRN: https://ssrn.com/abstract=2284689 or http://dx.doi.org/10.2139/ssrn.2284689

Oindrila Dey

Jadavpur University ( email )

Kolkata 700032
India

Swapnendu Banerjee (Contact Author)

Jadavpur University, Department of Economics ( email )

Kolkata, 700032
India
91-9330606340 (Phone)

Jadavpur University, Calcutta ( email )

Department of Economics
Calcutta 700032, West Bengal 700032
India
91-9330606340 (Phone)

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