Abstract Relative performance evaluation (RPE) is widely used to filter out common shocks, but it is prone to collusion. We study the performance of RPE when agents are differentially productive (or evaluated in a biased manner). While such diversity is always costly in a static setting, it can be useful in repeated interactions, because it makes it harder for agents to collude. We identify conditions under which the principal prefers independent or joint performance evaluation if agents are identical but prefers RPE if they are diverse. In low-skill industries, the principal should offer asymmetric contracts even to homogeneous agents—a form of favoritism—as the cheapest way to combat collusion. Our results generate novel empirical predictions and contribute to the recent literature linking accounting and labor economics.

ABSTRACT This study examines the spillover effect of bank financial misconduct on the uninsured deposits of peer banks within local markets. We first validate that misconduct banks experience an increase in deposit spreads and a corresponding outflow of deposits following the misconduct. We then show local peer banks exhibit divergent deposit responses, contingent on how misconduct is perceived by information recipients in different economic contexts. During normal periods, depositors receiving a negative signal about bank misconduct reallocate their funds from misconduct banks to local peers, a local reallocation effect that decreases deposit spreads and increases deposit inflows for peer banks. Cross‐sectional analysis further reveals that this local reallocation effect is more pronounced for financially sophisticated depositors, amplified when peer banks have strong fundamentals, but attenuated when misconduct banks are financially sound. During financial crisis periods, however, bank misconduct leads to withdrawals from both misconduct banks and their peer banks, a local contagion effect whereby local peer banks face increased deposit spreads and deposit outflows following the misconduct.