This paper offers a new theory of discrimination in the workplace. We consider a manager who has to assign two tasks to … employees expect to be favored. The manager, who has no taste for discrimination, discriminates in order to avoid demotivating …

side. We use the model to investigate the welfare effects of discrimination (also known as risk selection). We postulate … find that aggregate surplus decreases when risk aversion is high. When risk aversion is low however, discrimination …