Risk and Discrimination

Abstract

In the traditional Becker model of employer discrimination, discriminatory behavior arises from a utility-maximizing owner who balances firm profits against the disutility of hiring workers from the disadvantaged demographic group. However, in the modern firm, many human resource decisions are made by agents of the owner (i.e., managers) whose actions do not necessarily reflect the preferences of even profit-maximizing owners. In this paper, we present a principal-agent model of discrimination with a profit-maximizing principal (owner) and a gender-discriminating agent (management). We show that managerial discrimination is increasing with the degree of risk in the revenue-generating process. We then test this relationship using a Colombian plant-level dataset and show that, consistent with our model, the female share of the labor force is decreasing in various measures of both industry-level and plant-level volatility.