Favoritism in Organizations

Abstract

Objective measures of employee performance are rarely available. Instead, firms rely on subjective judgments by supervisors. Subjectivity opens the door to favoritism, where evaluators act on personal preferences toward subordinates to favor some employees over others. Firms must balance the costs of favoritism-arbitrary rewards and less productive job assignments-against supervisors' demands for authority over subordinates. We analyze the conditions under which favoritism is costly to organizations and the effects of favoritism on compensation, the optimal extent of authority, and the use of bureaucratic rules. Economists rarely address the fact that firms are social institutions, where personal relations among coworkers, bosses, and subordinates constitute an important component of many workers' daily lives. This paper takes a step toward addressing organizations as social entities by considering how favoritism by superiors, based on personal preferences toward subordinates, affects compensation and the structure of organizations. The underlying premise of the paper is that accurate and objective measures of a worker's performance are typically unavailable. Instead performance is gauged from subjective opinions