Don’t Demotivate, Discriminate: Outside-option

In this paper, an extension is studied for the model provided by Kamphorst and Swank (2016), they show that discrimination can be caused by employees expecting their manager to prefer one of the employees. An outside option is added to show that giving employees the option to quit their job to work for another company, can give the manager less reason to discriminate. A stable non-discriminatory equilibrium is found when a manager can be certain that the employee leaves, this is tested by differences in expected competence for the different jobs. This result is extended with parameters for differences in wage and the possibility of switching costs. Wage differences lead to a less discriminatory equilibrium than found in the basic model. When switching costs are added, although the trend is not always clear, the equilibria become more discriminatory when switching costs are included. Adding the outside option gives possible escapes for rational discrimination, this can help in the battle against discrimination.