This paper documents the negative responses in workers’ effort provision to the unfair treatment towards their peers in Chinese public high schools. Promotion applicant teachers with hometown or college ties to the school principal are twice more likely to be promoted than similarly qualified ones without such connections. Whether and when a teacher might have observed unfair promotions is inferred by contrasting the actual past promotions in her own school with the teachers’ fairness views regarding promotion qualifications, which are estimated using results from a survey in which teachers were asked to select anonymous peers to promote from a pool of applicants. 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 their 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 performance. Finally, a transparency reform that required principals to disclose to their peers the profiles of promotion applicant teachers reduced the principals’ bias and improved the overall productivity of schools.
