Abstract: We examine both the private benefits and spillover costs of labor market favoritism in a unique laboratory experimentdesign.Group identities are first created andthe data show that both employment preference rankings and wage offers favor in-group members. Workers positively reciprocate towards in-group employersby choosing higher effort in a gift exchange game. Thus, favoritism can be privately rationalfor employers.However, unemployed subjects are allowed toburn resources (at a cost to themselves), and we document significantly increased resource destruction when unemployment can be attributed tofavoritismtowards others. This highlights a significant spillover cost of favoritism that is often ignored, and it points to one possible micro-foundation of some anti-social behavior.

Keywords: Discrimination,Experimental Economics, Socialidentity, Conflicts

JEL Codes: C90, C92, J15, J16

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