Group Reputation and the Dynamics of Statistical Discrimination

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.Statistical Discrimination; Group Reputation; Reputation Trap; Forward-Looking Behavior

Toward An Economic Theory of Dysfunctional Identity

We advance a novel choice-theoretic model of "identity" based on the notions of categories and narratives. Identity is conceived as a matter of "reflexive perception" -- how people understand themselves. Choosing an identity is equivalent to making a generalization about one's past that highlights the most salient aspects of experience. When many individuals make a common choice in this regard, they embrace a collective identity which is dysfunctional if it is Pareto dominated by an alternative self-classificatory schema. Using a simple multi-stage risk sharing game, we explore conditions under which dysfunctional collective identities might be expected to emerge.Identity; Dysfunctional Collective Identity

Twenty-Five Years of Black America: Two Steps Forward and One Step Back?

The nature of social and economic inequality as it exists now between Blacks and Whites in the United States is explored in this paper. Summary statistics on education, earnings, employment, family structure, incarceration and life expectancy are presented by age, sex and race. It is suggested that, while progress has been made in narrowing the racial gap in social standing, there remains a significant disparity that warrants continuing concern

Who Cares about Racial Inequality?

The issue of Affirmative Action is discussed, identifying some difficulties with the way that this policy has been pursued in the past: Racial preferences can be a poorly targeted method of closing the gap in social status between Blacks and Whites, and can have negative unintended consequences for incentives and for the reputations of its beneficiaries. Nevertheless, it is argued that some form of affirmative action continues to be needed. The concept of developmental affirmative action is introduced. This form of racially targeted policy focuses primarily on the enhancement of competitive skills. In so doing, it avoids many of the aforementioned difficulties

Affirmative Action and Its Mythology

For more than three decades, critics and supporters of affirmative action have fought for the moral high ground ­ through ballot initiatives and lawsuits, in state legislatures, and in varied courts of public opinion. The goal of this paper is to show the clarifying power of economic reasoning to dispel some myths and misconceptions in the racial affirmative action debates. We enumerate seven commonly held (but mistaken) views one often encounters in the folklore about affirmative action (affirmative action may involve goals and timelines, but definitely not quotas, e.g.). Simple economic arguments reveal these seven views to be more myth than fact.

Color-Blind Affirmative Action

This paper presents a conceptual framework for understanding the consequences of the widespread adoption of race-neutral alternatives' to conventional racial affirmative action policies in college admissions. A simple model of applicant competition with endogenous effort is utilized to show that, in comparison to color-conscious affirmative action, these color-blind alternatives can significantly lower the efficiency of the student selection process in equilibrium. We examine data on matriculates at several selective colleges and universities to estimate the magnitudes involved. It is shown that the short-run efficiency losses of implementing color-blind affirmative action (in our sample) are four to five times as high as color-conscious affirmative action.

Group Inequality

This paper explores conditions under which inequality across social groups can emerge from initially group-egalitarian distributions and persist across generations despite equality of eco- nomic opportunity. These conditions arise from interactions among three factors: the extent of segregation in social networks, the strength of interpersonal spillovers in human capital accumu- lation, and the responsiveness of relative wages to the skill composition in production. Social segregation is critical in generating these results: group inequality cannot emerge or persist un- der conditions of equal opportunity unless segregation su¢ ciently great. We also show that if an initially disadvantaged group is su¢ ciently small, integration above a threshold level can induce both groups to invest more in human capital, while the opposite holds if the disadvantaged group is large.segregation, networks, group inequality, human capital

Toward An Economic Theory of Dysfunctional Identity

We advance a novel choice-theoretic model of “identity” based on the notions of categories and narratives. Identity is conceived as a matter of “reflexive perception” — how people understand themselves. Choosing an identity is equivalent to making a generalization about one’s past that highlights the most salient aspects of experience. When many individuals make a common choice in this regard, they embrace a collective identity which is dysfunctional if it is Pareto dominated by an alternative self-classificatory schema. Using a simple multi-stage risk sharing game, we explore conditions under which dysfunctional collective identities might be expected to emerge

The economics of rotating savings and credit associations

This paper examines the role and performance of an institution for allocating savings which is observed world wide - rotating savings and credit associations. We develop a general equilibrium model of an economy with an indivisible durable consumption good and compare and contrast these informal institutions with credit markets and autarkic saving in terms of the properties of their allocations and the expected utility which they obtain. We also characterize Pareto efficient and expected utility maximizing allocations for our economy, which serve as useful benchmarks for the analysis. Among our results is the striking finding that rotating savings and credit associations which allocate funds randomly may sometimes yield a higher level of expected utility to prospective participants than would a perfect credit market.Supported by the Center for Energy Policy studies, M.I.T. and the Japanese Corporate Associates Program at the Kennedy School of Government