Race, Information, and Segregation

Abstract

This paper presents several related economic models that explore the relationships between imperfect information, racial income disparities, and segregation. The use of race as a signal arises here, as in models of statistical discrimination, from imperfect information about the return to transactions with particular agents. If agents are able to learn from transactions, racial signaling can emerge with only minimal assumptions about the ex ante importance of race. In a search framework, this signaling supports not simply a discriminatory equilibrium, but a pattern of racially segregated transactions, which in turn perpetuates the informational asymmetries. Minority groups necessarily suffer disproportionately from segregation, since the degree to which transactions opportunities are curtailed depends upon group size. However, in some variants of the model, endogenous segregation will be mutual, since minority agents face an adverse selection of majority agents who are willing to trade with them.

JEL Classification: J71