Group Reputation and the Dynamics of Statistical Discrimination

Kim, Young Chul and Loury, Glenn (2009): Group Reputation and the Dynamics of Statistical Discrimination.

Abstract

Previous literature on statistical discrimination explained stereotypes based on the existence of multiple equilibria, in which principals have different self-confirming beliefs about different social groups (Arrow, 1973; Coate and Loury, 1993). However, the literature has not provided an account of where the principals' prior beliefs come from. Moreover, the static models dominating the literature do not offer relevant information about the dynamic paths that lead to each equilibrium. This paper develops a dynamic version of statistical discrimination in which economic players' forward-looking behaviors determine the dynamic paths to each equilibrium. Defining ``Group Reputation'' as the objective information shared by principals regarding the average characteristics of agents belonging to each group, this study identifies groups as advantaged or disadvantaged, based on their initial reputation states, and provides conditions by which a group can switch from one reputation state to another. By understanding this dynamic structure of reputation evolution, we examine the strategy that well-coordinated principals may voluntarily utilize to maximize their profits, helping the group in the reputation trap to improve its skill investment rate.

• Item Type: MPRA Paper
• Language: English
• Keywords: Statistical Discrimination; Group Reputation; Reputation Trap; Forward-Looking Behavior
• Subjects: H - Public Economics > H0 - General; J - Labor and Demographic Economics > J6 - Mobility, Unemployment, Vacancies, and Immigrant Workers > J60 - General; J - Labor and Demographic Economics > J7 - Labor Discrimination > J71 - Discrimination

References

Adsera, A and D. Ray (1998). ``History and Coordination Failure," Journal of Economic Growth 3: 267-276.

Arrow, K.J. (1973). ``The Theory of Discrimination," In Ashenfelter and Rees, editions, Discrimination in Labor Markets.

Bowles, S., G.C. Loury and R. Sethi (2007). ``Group Inequality," Unpublished Manuscript, Barnard College, Columbia University.

Blume, Lawrence (2006), ``The Dynamics of Statistical Discrimination,'' Economic Journal 116: F480 - F498. Card, D., A. Mas and J. Rothstein (2007). ``Tipping and the Dynamics of Segregation,'' NBER working paper 13502.

Chaudhuri, S. and R. Sethi (2008). ``Statistical Discrimination with Peer Effects: Can Integration Eliminate Negative Stereotypes?" Review of Economic Studies 78: 579 - 596.

Coate, Steven and Glenn Loury (1993). ``Will Affirmative-Action Policies Eliminate Negative Stereotype?" American Economic Review 83: 1220-1240.

Fryer, Roland, Glenn C. Loury and Tolga Yuret (2006). ``An Economic Analysis of Color-Blind Affirmative Action,'' Journal of Law, Economics and Organization, forthcoming.

Fryer, Roland and Glenn C. Loury (2005). ``Affirmative Action and Its Mythology,'' Journal of Economic Perspectives 19.

Kim, Young Chul (2008). ``Network Externality and the Dynamics of Group Inequality," Unpublished Manuscript, Brown University.

Krugman, Paul (1991). ``History Versus Expectations,'' Quarterly Journal of Economics 106: 651-667.

Levin, Jonathan (2009). ``The Dynamics of Collective Reputation,'' The B.E. Journal of Theoretical Economics 9.

Loury, Glenn C. (1977). ``A Dynamic Theory of Racial Income Differences,'' In Women, Minorities and Employment Discrimination, edited by Phyllis Wallace and Annette LaMond.

Loury, Glenn C. (1995). ``Economic Discrimination: Getting to the Core of the Problem,'' in One By One From the Inside Out: Essays and Reviews on Race and Responsibility in America. New York: The Free Press.

Loury, Glenn C. (2002). The Anatomy of Racial Inequality, Harvard University Press

Moro, A. and P. Norman (2003). ``Affirmative Action in a Competitive Economy,'' Journal of Public Economics 87: 567-594.

Moro, A. and P. Norman (2003). ``A General Equilibrium Model of Statistical Discrimination,'' Journal of Economic Theory 114: 1-30.

Myrdal, Gunnar. (1962), An American Dilemma: The Negro Problem and Modern Democracy. New York: Pantheon Books.

Norman, P. (2003). ``Statistical Discrimination and Efficiency,'' Review of Economic Studies 70: 615-627.

O'Flaherty, D. and R. Sethi (2008). ``Racial Stereotypes and Robbery,'' Journal of Economic Behavior \& Organization, forthcoming.

Phelps, E. (1972). ``The Statistical Theory of Racism and Sexism," American Economic Review 62: 659-661.

Schwab, S. (1986). ``Is Statistical Discrimination Efficient?'' American Economic Review 76: 229-234.

Spence, Michael A. (1974). Market Signaling: Information Transfer in Hiring and Related Screening Processes, Cambridge, MA: Harvard University Press.

Tirole, Jean (1996).``A Theory of Collective Reputation,'' Review of Economic Studies 63: 1-22.