Strategic discrimination in hierarchies

In a laboratory setting, we explore strategic discrimination in principal-agent relationships, which arises from mutually reinforcing 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 subpopulations and outright prejudice. We find that, in a strategic setting, principals who reward agents on the basis of 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 nonstrategic 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 underappreciate this conditionality, principals tend to underestimate the effort from outgroup agents.