Risk and Discrimination

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 (managers) whose actions may not reflect the preferences of even profit-maximizing owners. We present a principal-agent model of discrimination with a profit-maximizing owner and a gender-discriminating manager and show that managerial discrimination is increasing with the degree of risk in the firm's revenue stream. Empirical tests using a Colombian plant-level dataset support a prediction of our model that female workers should be under-represented in more revenue volatile firms and industries.