Abstract
According to a classical argument, an employer handicaps herself if basing hiring decisions on factors unrelated to productivity; therefore, discrimination is undermined by competition. This paper, in contrast, argues that being discriminatory can be a commitment device that helps an employer and its rivals to partially segment the labor market, which leads to lower wages and higher profits. Discrimination can thus be an endogenous response to competition. Indeed, the relationship between discrimination and competition can be non-monotone. Moreover, the logic suggests that a ban on wage discrimination may instead lead to discrimination in hiring.
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