33 Pages Posted: 21 Oct 2009 Last revised: 15 Jun 2020
Date Written: November 15, 2013
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.
Keywords: discrimination, trust, social capital, opportunism, reputation spillover
JEL Classification: J71, J24, D63, L14
Suggested Citation: Suggested Citation