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Opportunistic Discrimination

  • Rick Harbaugh

    (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)

  • Ted To

    (Bureau of Labor Statisics)

When can you cheat some people without damaging your reputation among others? In a trust game between a firm and a series of individuals from two groups of different sizes, the firm has more incentive to cheat minority individuals because trade with the minority is less frequent and the long-term benefits of a reputation for fairness toward the minority are correspondingly smaller. If the majority is sufficiently large it gains nothing from a solidarity strategy of punishing opportunism against the minority, so the firm can continue doing business with the majority even if it cheats the minority. When some firms have a preference-based bias against the minority, the interaction with reputation effects gives all firms a stronger incentive to cheat the minority, and discrimination is the unique equilibrium for firms of intermediate patience.

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File URL: http://kelley.iu.edu/riharbau/RePEc/iuk/wpaper/bepp2008-07-harbaugh-to.pdf
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Paper provided by Indiana University, Kelley School of Business, Department of Business Economics and Public Policy in its series Working Papers with number 2008-07.

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Date of creation: Nov 2008
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Handle: RePEc:iuk:wpaper:2008-07
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