Economics has a long tradition of studying discrimination. In this tradition, Economists classify discrimination based on its causes: it can arise from different preferences towards various groups or from different beliefs about the abilities of those groups. In joint research with Elena Pikulina, Professor Daniel Ferreira of the LSE Department of Finance shifts the focus from causes to transparency: is discrimination subtle or overt?
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WATCH: Subtle Discrimination with Daniel Ferreira, LSE
The key feature of subtle discrimination is plausible deniability
In our research we define subtle discrimination as biased acts that cannot be objectively identified as discriminatory. The key feature of subtle discrimination is plausible deniability. For example, imagine a supervisor who must promote one of two equally qualified candidates. Suppose the supervisor is biased and is more likely to promote candidates from one group, for example, men instead of women. The supervisor might deny this bias by claiming they use subjective criteria, such as leadership potential, which only they can assess. This allows the supervisor to plausibly deny any bias, making the discrimination subtle.
How does this affect the behaviour of the worker? There are two possibilities.
This perspective is new to economics and finance, and helps us understand the consequences of discrimination, particularly when we consider the careers of knowledge workers, such as those in finance and technology. For instance, consider two candidates competing for a promotion. Suppose they have similar qualifications, but come from different groups, let’s call them blue and red. The company wants to promote the most qualified candidate. But if the candidates are very similar, the company is more likely to promote the blue worker. So, according to our terminology, the company is subtly biased toward the blue candidate.
How does this affect the behaviour of the red worker? There are two possibilities. First, the red worker may think: why should I work hard for a promotion if the blue worker will be promoted anyway? In this case, the red worker will be discouraged from making the necessary investments to become promotable. This discouragement effect means fewer red workers will qualify for promotions. Alternatively, the red worker might realize they need to be better qualified than the blue worker to get promoted, leading to an overcompensation effect, where they work even harder.
Women might be discouraged from investing in promotable tasks or feel they need to over-invest to have a fair shot at promotion
In the context of gender differences in promotion, we often hear both stories. Women might be discouraged from investing in promotable tasks or feel they need to over-invest to have a fair shot at promotion. The question is: when should we see discouragement versus overcompensation? We show that it depends on the stakes involved. In high-stakes careers, blue workers have strong incentives to work hard, discouraging red workers from trying to outperform them. This could explain why women might shy away from competition in high-stakes situations, it’s just a consequence of subtle discrimination. Meanwhile, in low-stakes careers, blue workers might not work as hard, giving red workers a chance to compensate by working harder. So, in low-stakes situations, the overcompensation effect dominates.
Our theory explains why some companies invest in building a progressive corporate culture while others are happy to maintain a conservative image
In our work, we also explore whether companies benefit from subtle discrimination. The answer depends on the stakes. Companies that offer high-stakes careers do not benefit because discrimination discourages certain workers from working hard. In contrast, companies that offer low stakes careers might benefit from the extra effort exerted by discriminated workers.
Our theory explains why some companies invest in building a progressive corporate culture while others are happy to maintain a conservative image. Subtle discrimination harms high-productivity companies because it discourages discriminated workers from investing in valuable skills. On the other hand, low-productivity companies benefit from holding discriminated workers to higher standards, because these employees will overcompensate by working harder. These effects create polarization: Companies that employ high skilled workers strive for a progressive image, while companies that employ mostly low skilled workers prefer a conservative one.
Daniel Ferreira is Professor of Finance at the London School of Economics and Political Science.
Read more about his work at https://sites.google.com/view/danielferreira