| HBS Working Paper Series
The Unfairness Trap: A Key Missing Factor in the Economic Theory of Discrimination
Prior evidence linking increased female representation in management to corporate performance has been surprisingly mixed, due in part to data limitations and methodological difficulties, and possibly to omission of a fairness factor in the economic theory of discrimination. Using modified theory and panel data from a nationally representative sample of Japanese firms in the 2000s, we address several of these shortcomings. We find that increases in the ratio of female executives, the presence of at least one female executive, and the presence of at least one female section chief are associated with increases in corporate profitability in the manufacturing sector. North American multinationals operating in Japan also enjoy outsized benefits from hiring and promoting female managers. The results are robust to controlling for time effects and company fixed effects and the time-varying use of temporary and part-time employees. Some of the competitive benefit of employing female managers is shown to flow from compensation savings, but a much larger part arises from direct productivity increases. Prior economic theory on discrimination implied that those who hire inexpensive and underutilized female talent will see a performance benefit; we find, however, that due to possible social comparison costs, only companies whose compensation of female talent compares well with an external benchmark will see a significant performance benefit.