The modern corporation as a safe haven for taste-based discrimination: An agency model of hiring decisions

This paper proposes a principal–agent model of labour market discrimination. In this model, the firm manager is a taste-based discriminator and has to make unobservable hiring decisions that determine the shareholder's profits, because workers differ in skill. The model shows that performance-based contracts may moderate the manager's propensity to discriminate, but that they are unlikely to fully eliminate discrimination. Moreover, the model predicts that sectors with high skill leverages discriminate less. Finally, the impacts of a wage gap between groups and of a diversity premium are investigated.

Research Highlights► An agency problem is present in hiring decisions. ► Shareholders wish the most skilled workers to be hired so as to maximise profit. ► Managers inclined to discriminate do not base hiring decisions on skill alone. ► Performance-based contracts may mitigate but not fully eliminate discrimination. ►Sectors with high skill leverages should discriminate less.