A Theory of Affirmative Action in College Admissions: An All-Pay Auction Approach

This paper analyzes the incentive effect of affirmative action at college admissions level in an asymmetric, complete-information, all-pay auction model. One minority and one non-minority candidate compete for a seat in a college. The admissions officer may unequally weigh candidates’ academic quality to address certain policy concern. Moderately administered preferential admissions procedure, which handicaps the non-minority candidate, may correct the negative effect of discrimination in labor market on minority candidate’s incentive to make educational effort. I show there exists a positive externality between the minority and the non-minority candidates’ incentive. As a consequence, a unique optimal policy coefficient exists that maximizes individual efforts, the aggregate effort, and the expected winning academic quality simultaneously. This result then reconciles the often assumed conflicts between diversity and academic quality in the current debate. However, I also conclude that excessive preferential treatment may potentially lead to “reverse discrimination”. In addition, I find the affirmative action admissions mechanism improves the non-minority’s incentive more than the targeted minority candidate, which tends to widen the racial gap in educational attainment. JEL classification: D78, I21, J71 A Theory of Affirmative Action in College Admissions: An All-Pay Auction Approach