Induced Discrimination and Firm Size: Information Vs Incentive Effects

Abstract

An investigation is conducted to determine the effectsof incentives and information disadvantagesin the adoption of practicesin small firms, with specific regard to firm responses to the Civil Rights Actof 1991 (CRA91). Person Records from the Census Bureau Current PopulationSurvey data for the years 1989-1997 are used to assess discriminatorybehaviorarising from CRA91, due to the perceived higher cost and risk oflitigation associated with hiring minorities and women. Results indicate that both small and large firms responded to CRA91. Inmedium and large firms, discrimination was shown to decrease in the first yearCRA91 was implemented. Conversely, discrimination increased in the years thatfollowed. Little evidence was found for the hypothesis that smaller firms areless likely to respond to CRA91 due to a lack of information that may resultfrom broadcast and contagion effects. It is also observed that damageintroduced by CRA91 has increased the inherent wages of protected groupemployees. Consequently, these wages create incentives for firms todiscriminate against protected groups during the hiring process. The findingssuggest that firms' behaviors correspond with their economic incentives. It isconcluded that there is no firm size disadvantage in the dispersal ofinformation about CRA91. (NEE)

Keywords: Civil Rights Act of 1991, Firm size, Incentives, Information dissemination, Innovation process, Diffusion of innovations, Employment discrimination, Firm behavior