The Costs of Workplace Favoritism: Evidence from Promotions in Chinese High Schools

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This paper studies the productivity consequences of favoritism in employee promotions within organizations. Using data from public high schools in four Chinese cities, I first show that teachers with hometown or college ties to the school principal are twice as likely to be promoted to a higher rank, after controlling for their application profiles and value-added in student scores. I then elicit the teachers' revealed fairness notions regarding promotion qualifications using a survey in which they were asked to select anonymous peers to promote from a pool of virtual promotion applicants. Contrasting these with actual past promotions measures if and when a teacher might have observed unfair promotions in their own school in the past. Exposure to unfair promotions adversely affects non-applicant teachers’ output, lowering their value-added and raising the probability that high-value-added teachers quit. The value-added effect appears to be driven primarily by teachers’ social preferences for peer workers and the consequent erosion of working morale when peers suffer unfair treatment, while the quitting effect comes mainly from non-favored prospective applicants’ career concerns as they learn about the principal’s bias and leave due to poor promotion prospects. These adverse spillover incentive effects lead to a substantial reduction in school-wide value-added. Finally, a transparency reform that required principals to disclose the profiles of promotion applicants reduced the principals’ bias and improved the overall productivity of schools.