Strategic Discrimination in Hierarchies

In a laboratory setting, we explore strategic discrimination in principal-agent relationships, which arises from mutually re-enforcing expectations of identity-contingent choices. Our experimental design isolates the influence of the strategic environment from effects of other sources of discrimination, including statistical differences between sub-populations and outright prejudice. We find that, in a strategic setting, principals who reward agents based on outcomes more readily attribute high performance to effort when they share the agent's group identity. No such bias exists either for principals whose reward decisions are outcome-independent or for principals in a non-strategic environment. Agents in the strategic setting tend to anticipate higher demands from out-group principals, and condition their effort choice on that expectation. Because they under-appreciate this conditionality, principals tend to underestimate the effort from out-group agents.