We consider a model of endogenous human capital formation with competitively
determined wages. In the presence of two distinguishable, but ex ante identical groups
of workers, we show that discrimination is sustainable in equilibrium, even if the
corresponding model with a single group of workers has a unique equilibrium. An affirmative
action policy consisting of a quota may ``fail'' in the sense that there still may
be equilibria where groups are treated differently. However, the incentives to invest
for agents in the discriminated group are improved by affirmative action if the initial
equilibrium is the most discriminatory equilibrium in the model without the policy.
The welfare effects are ambiguous. We demonstrate that it is possible that the policy
makes the intended beneficiaries worse off: even if the starting point is the most
discriminatory equilibrium the expected payoff may decrease for all agents in the target
Moro, Andrea, and Peter Norman. "Affirmative action in a competitive economy,"
Journal of Public Economics 87(3),
pp. 567-594, March
title = "Affirmative action in a competitive economy",
author = "Moro, Andrea and Peter Norman",
year = "2003",
month = " March",
journal = "Journal of Public Economics",
number = "3",
volume = "87",
pages = "567-594",
url = "https://andreamoro.net/assets/papers/jpub2003.pdf"