Discrimination in Strategic Settings

In a laboratory investigation of a principal-agent relationship with moral hazard, we analyze strategically induced identity-based discrimination. We find that when principals use the sanctioning tools at their disposal in an outcome-contingent way, they attribute good outcomes more readily to their agents' effort and reward their agents more frequently when they share a social identity; when principals have no access to sanctioning tools or have access to them but do not use them to reward higher outcomes, their beliefs about agents' effort are not contingent on sharing agents' social identity. In a strategic setting, agents tend to anticipate needing to meet a lower outcome threshold to receive a reward from the same-identity principals and condition their effort choice on that expectation. They increase their effort in response to higher expected outcome demands and higher expectation of favorable identity-based reward bias. While, on average, principals' expectations about effort by same-identity agents tend to be close to correct, they underestimate the effort of the other-identity agents. A key factor determining the agents' responsiveness to their expectation of the principals' reward bias is the agents' attitude toward risk