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Stochastic Appraisal: A Theory with an Application to Random Favouritism

Oindrila Dey () and Swapnendu Banerjee

Indian Economic Review, 2016, vol. 51, issue 1, 83-103

Abstract: The paper identifies conditions under which incorporating stochasticity while providing appraisal to agents emerges as an optimal outcome within an organization. Using a moral hazard framework with limited liability it is shown that if provision of appraisal is made stochastic then the principal can do better vis-a-vis the standard case, provided payoff of the principal is sufficiently small. An application of the model provides game theoretic foundation behind the emergence of random favouritism. If the group size is small and /or when the return of the firm is low, preferring an agent randomly from the principal's favoured group can be optimal.

Keywords: Stochastic; Moral Hazard; Status-incentives; Favouritism; Optimal Contract (search for similar items in EconPapers)
JEL-codes: D86 L14 L20 (search for similar items in EconPapers)
Date: 2016
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Indian Economic Review is currently edited by Pami Dua (Editor) & Ram Singh (Associate Editor) and Sunil Kanwar

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