This discussion paper led to a publication in the American Economic Journal: Microeconomics.
This paper offers a new theory of discrimination in the workplace. We consider a manager who has to assign two tasks to two employees. The manager has superior information about the employees' abilities. We show that besides an equilibrium where the manager does not discriminate, equilibria exist where the manager discriminates in favor of the employee whom the employees expect to be favored. The manager, who has no taste for discrimination, discriminates in order to avoid demotivating the 'favorite'. We show that the non-discriminatory equilibrium is unstable. Yet the manager would prefer to commit not to discriminate.