Affirmative action in the presence of a creamy layer

We examine affirmative action (AA) policies in a framework with statistical discrimination, where the target group, namely the "blacks", have a creamy layer (CLB) co-existing with a poorer section (PB). Further, the PB workers have to access an imperfect credit market if they want to invest in skill acquisition. We derive conditions for the existence of non-stereotyping, as well as patronizing equilibria (where employers hold the target group to lower standards via-a-vis the non-target group, the "whites"). We find that demographic shifts, whereby poorer blacks graduate to the "creamy layer", adversely affect all three groups under a patronising equilibrium, in the sense that a lower proportion is assigned to skilled jobs. Further, we demonstrate that a transition from identity-based to a class-based AA would be politically divisive, in that such a move would be opposed by at least two of the three groups, regardless of whether the equilibrium involves patronization, or not. In fact, CLBs would always be made worse off by such a transition. We also examine the implications of introducing a role model effect, as well as targeted education subsidies.