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. The authors 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. Copyright 1996 by University of Chicago Press.