Abstract
We examine both the private benefits and spillover costs of labor market favoritism in a unique laboratory experiment design. Our data show that both employment preference and wage offers favor in-group members. Workers positively reciprocate towards in-group employers by choosing higher effort in a gift-exchange game. Thus, favoritism can be privately rational for employers. However, unemployed subjects are allowed to burn resources (at a cost to themselves), and we document significantly increased resource destruction when unemployment can be attributed to favoritism towards others. This highlights a significant spillover and often ignored cost of favoritism, and it points to one possible micro-foundation of some antisocial behavior.
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