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Collective Reputation and the Dynamics of Statistical Discrimination

  • Kim, Young-Chul
  • Loury, Glenn

Economists have developed theoretical models identifying self-fulfilling expectations as an important source of statistical discrimination in labor markets (Arrow, 1973). The static models dominating the literature of statistical discrimination, however, may leave the false impression that a bad equilibrium is as fragile as a "bubble" and can burst at any moment when expectations flip. Such models thus understate the adversity that disadvantaged groups face in seeking to escape bad equilibria. By developing a dynamic version of a statistical discrimination model based on Coate and Loury's (1993) original setup, we clarify the limits of expectations-related fragility. We show that when a group is strongly affected by negative reputational externalities, the group cannot escape a low skill investment trap, regardless of how expectations are formed. By examining the evolution of stereotypes in this way, we also provide new insights into egalitarian policies.

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File URL: https://mpra.ub.uni-muenchen.de/54950/1/MPRA_paper_54950.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 54950.

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Date of creation: 12 Aug 2012
Date of revision: 31 Mar 2014
Handle: RePEc:pra:mprapa:54950
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  1. Coate, S. & Loury, G.C., 1992. "Will Affirmative Action Policies Eliminate Negative Stereotypes?," Papers 3, Boston University - Department of Economics.
  2. Shubham Chaudhuri & Rajiv Sethi, 2008. "Statistical Discrimination with Peer Effects: Can Integration Eliminate Negative Stereotypes?," Review of Economic Studies, Oxford University Press, vol. 75(2), pages 579-596.
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