Does cronyism pay? Costly ingroup favoritism in the lab

Sheheryar Banuri, Catherine Eckel and Rick K. Wilson

Economic Inquiry, 2022, vol. 60, issue 3, 1092-1110

Abstract: Cronyism in firms arises when favoritism toward an ingroup affects personnel decisions. Two main motives underlie cronyism: profit, if an ingroup employee works harder; or altruism, if used to transfer resources. In a lab‐experiment trust game with naturally‐occurring groups, an employer (proposer) faces an employee (responder) who is or is not an ingroup member. We see that both motives play a role. Cronyism is more likely from employers who are more altruistic to the ingroup in a dictator game; and even low‐productivity (by design) ingroup members reciprocate trust generously. Cronyism pays for those who engage in it.

Date: 2022
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