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Statistical Discrimination with Peer Effects: Can Integration Eliminate Negative Stereotypes?


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  • Shubham Chaudhuri
  • Rajiv Sethi


We introduce peer effects in the costs of human capital acquisition into a model of statistical discrimination in labour markets. This creates a link between the level of segregation in social networks and racial disparities in job assignment and wages. We show that this relationship is characterized by discontinuities: there is a threshold level of segregation below which negative stereotypes become unsustainable, and steady-state skill levels can change dramatically. This change can work in either direction: skill levels may either rise or fall in both groups. Which of these outcomes arises depends on the population share of the disadvantaged group and on the distribution of the costs of human capital investments. We also examine the effects of affirmative action policies in the presence of peer effects and provide conditions under which such policies eliminate negative stereotypes. Copyright 2008, Wiley-Blackwell.

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Bibliographic Info

Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 75 (2008)
Issue (Month): 2 ()
Pages: 579-596

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Handle: RePEc:oup:restud:v:75:y:2008:i:2:p:579-596

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Cited by:
  1. Rajiv Sethi & Muhamet Yildiz, 2009. "Public Disagreement," Economics Working Papers, Institute for Advanced Study, School of Social Science 0089, Institute for Advanced Study, School of Social Science.
  2. Kim, Young Chul & Loury, Glenn, 2009. "Group Reputation and the Dynamics of Statistical Discrimination," MPRA Paper 18765, University Library of Munich, Germany.
  3. Seung Han Yoo, 2013. "A Theory of Group Inequality," Discussion Paper Series, Institute of Economic Research, Korea University 1309, Institute of Economic Research, Korea University.
  4. O'Flaherty, Brendan & Sethi, Rajiv, 2010. "Homicide in black and white," Journal of Urban Economics, Elsevier, vol. 68(3), pages 215-230, November.
  5. Brendan O'Flaherty & Rajiv Sethi, 2004. "Racial stereotypes and robbery," Discussion Papers, Columbia University, Department of Economics 0405-15, Columbia University, Department of Economics.
  6. Wido Geis, 2010. "High Unemployment in Germany: Why do Foreigners Suffer Most?," Ifo Working Paper Series, Ifo Institute for Economic Research at the University of Munich Ifo Working Paper Nr. 90, Ifo Institute for Economic Research at the University of Munich.
  7. Alexandre, Michel, 2011. "Endogenous categorization and group inequality," MPRA Paper 33239, University Library of Munich, Germany.
  8. Kim, Young Chul, 2009. "Group Reputation and the Endogenous Group Formation," MPRA Paper 18575, University Library of Munich, Germany.
  9. Samuel Bowles & Glenn C. Loury & Rajiv Sethi, 2009. "Group Inequality," Economics Working Papers, Institute for Advanced Study, School of Social Science 0088, Institute for Advanced Study, School of Social Science.
  10. Kim, Young Chul, 2009. "Lifetime Network Externality and the Dynamics of Group Inequality," MPRA Paper 18767, University Library of Munich, Germany.
  11. Kim, Young-Chul & Loury, Glenn, 2012. "Collective Reputation and the Dynamics of Statistical Discrimination," MPRA Paper 54950, University Library of Munich, Germany, revised 31 Mar 2014.
  12. Ouazad, Amine & Rancière, Romain, 2011. "Credit Standards and Segregation," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8300, C.E.P.R. Discussion Papers.


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