Screening Workers with Affirmative Action

TL;DR

This paper analyzes optimal screening contracts considering group identity and cost types, showing how affirmative action policies influence contract design based on cost distributions and tax credits.

Contribution

It introduces a two-dimensional screening model incorporating group identity, revealing conditions under which affirmative action and non-discrimination are optimal.

Findings

Optimal contracts induce full separation of group and cost type.

Higher tax credits increase the threshold for hiring protected group agents.

Pooling or separation depends on the relative cost types of protected versus non-protected groups.

Abstract

This paper examines the optimal contracts in a two-dimensional screening model where one dimension(group identity) is verifiable by agents but not falsifiable. A principal offers contracts to agents who differ in cost types and group membership. Motivated by the United States Federal policy, Work Opportunity Tax Credit, the principal receives tax benefits for hiring agents from protected groups. Under the assumption that the protected agents tend to have higher cost types, the optimal contract induces full separation across both dimensions: agents reveal the cost type and the group identity through contract choice. Furthermore, the principal is willing to hire the trait agents with a higher cost threshold than the non-trait agents, and this threshold increases with the tax credit. Conversely, when the protected agents tend to have lower cost types, the optimal design without tax credits pools groups while separating by cost type. These results demonstrate that both affirmative action and non-discrimination can be optimal depending on the cost distribution ordering across groups.