Many modern economies pursuant of affirmative action, provide preferential treatment to special groups of people at many stages of their lives. For example, the 1971 New Economic Policy launched in Malaysia guaranteed preferential treatment of Malays in universities as well as services. The Indian Constitution and government policies enacted since Independence, ensure a 49.5% reservation of seats for citizens from backward castes (and tribes and classes) in all public and public funded educational institutions and in all public service appointments. Do we really need handicapping at all stages?
This paper examines the popularly held belief that “the earlier affirmative action is used in education or career development, the better”, in an imperfect information world where employers hire from a pool of applicants who have had to complete some prior developmental (training) stage. The developmental programs are constrained by capacity. Typically, a historically backward group has lower success rate in attending developmental programs and this gets reflected in their low success rate at the terminal employment stage. A policymaker concerned about the representation of the disadvantaged group in the terminal employment, would have a choice between affecting the hiring rules so as to enable a greater representation from a given pool of applicants ("late" affirmative action) and providing the disadvantaged group with greater access to the training program, thereby affecting the pool of applicants, but keeping the hiring rules unchanged ("early" affirmative action ).
I analyze this question in models where output observable and unobservable. When output is observable, "late" affirmative action, in the form of lowered hiring standards for workers of the disadvantaged group is recommended whenever training opportunities are relatively few and "early" affirmative action, in the form of softened admission policies is recommended when training opportunities are relatively abundant. Under output unobservability, however, both "early" and "late" affirmative action, is required. This is because imperfect information causes individual incentives to be mis-aligned from socially optimal incentives and affirmative action targeting only the early or only the late stage are unable to correct for this distortion.
Although the makers of the Indian Constitution recommended doing away with the reservation system soon after the economy was born, little heed has been paid to the advice, partly because there was no clear-cut trajectory to follow for the future govts and partly because of political motives. If the Constitution was to be re-written to incorporate a definite path for the reservation targets, how should the preferential policy targets evolve over time? Specifically, can too much affirmative action ever cause the economy to get stuck in a "patronization trap", a scenario where initial affirmative action has affected incentives so adversely that the later generations must be awarded preferential treatment if certain representation goals are to be met.
This paper addresses the above question in a dynamic general equilibrium model where parental education (qualification) has a positive spillover on the child’s cost of exerting effort and acquiring human capital. The labor market is allowed to be identity-sighted (meaning both wages as well as hiring policies can be made contingent on an individual's identity) and an individual's qualifications are imperfectly observed. It is observed that, if the externality factor is high enough, then, asymptotic convergence in the rates of investment in human capital across groups with historically different rates of qualification, can take a very long time under the Laissez-faire equilibrium. If there is a social loss per-period of having very diverse success rates for the two groups in employment, say in the form of civil unrest, then the govt. might want to intervene and limit the disparity in representation allowed in each period.
When the govt. does embark on such a policy, I find that, under certain conditions, affirmative action might serve to discourage effort among the target group of workers (the group whose representation is of concern), which goes on to adversely affect the cost distributions of the future generations. Since the future generations find it even harder to exert effort, the representation of the two groups that would obtain without any affirmative action, would be even more unequal, thereby requiring the govt. to engage in more severe affirmative action. This perverse cycle can continue to persist for long, eventually leading the economy to a long run equilibrium characterized by non-vanishing affirmative action policies and a low long run rate of human capital investment, or a "patronization trap".