Firms using affirmative action policies may perform better because of a welcoming work environment, better candidates, peer effects in diverse teams, but also because of stronger incentives that are targeted better. Unequal standards in contests, such as a lower bar for promotion for historically underrepresented groups, may motivate greater effort than equal ones. The reasoning is as follows.

If people expect to have unequal performance, then equal standards may demotivate everyone, because the high performers think the promotion or bonus is almost assured even without further effort, and the low performers believe the prize is unattainable, so no point in trying. In this case, setting a higher bar for the better-performing group can incentivise both groups, like different divisions in sports. The result that equalising a contest motivates greater effort is fairly general in game theory. Contests may even motivate overprovision of effort relative to the socially efficient level.

A similar effort-increasing effect of unequal standards occurs even if the groups have equal performance, provided their preferences differ. For example, if men value winning a contest (for evolutionary or other reasons), then they exert greater effort in a competitive environment where some but not all can get promoted. If women care little about winning and focus on absolute compensation, then promoting all of them does not significantly reduce their work incentives. An employer who does not internalise the full cost of the employees’ effort wants them to overwork, thus in such an environment optimally sets a high bar for the promotion of men, but a low bar for women.

On the other hand, if there is a limited number of promotion slots, then it may be optimal to give all these to men, because this increases total effort in the firm the most, and use other compensation (salary, bonuses, flex-work) to motivate women.