Efficient Favouritism with Status Incentives: A Moral-Hazard Game of Delegation and Recognition

This paper studies the interaction between status incentives and organizational design in a two-agent moral hazard framework with limited liability. A risk-neutral principal chooses between two regimes: favouritism, under which one agent receives exclusive decision rights and status recognition for successful project implementation, and fairness, under which both agents share equal decision rights and status is distributed across agents. We show that status incentives can make ex-post favouritism optimal even when the principal does not exhibit any ex-ante preferential bias toward any particular agent. Introduction of status incentives shrink the parameter region supporting interior inefficient favouritism, and eliminate it entirely whenever project returns are large enough to sustain interior contracts for both agents. We also show that, for a non-empty set of primitive parameter values, the principal’s optimal regime can be non-monotonic in status: favouritism is optimal when status valuation is sufficiently low or sufficiently high, while fairness may dominate for intermediate values. The results shed light on why selective, hierarchical recognition systems coexist with flat team-credit structures across organizations.