Collective Reputation and the Dynamics of Statistical Discrimination

37 Pages Posted: 19 Dec 2009 Last revised: 1 Apr 2014

See all articles by Glenn C. Loury

Glenn C. Loury

Brown University - Department of Economics; Brown University - Watson Institute for International and Public Affairs

Young-Chul Kim

Sangmyung University

Multiple version iconThere are 2 versions of this paper

Date Written: March 31, 2014

Abstract

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.

Keywords: Statistical Discrimination,Collective Reputation, Reputation Trap, Forward-Looking Behavior

JEL Classification: D63, J70, J15, D82

Suggested Citation

Loury, Glenn C. and Kim, Young-Chul, Collective Reputation and the Dynamics of Statistical Discrimination (March 31, 2014). Available at SSRN: https://ssrn.com/abstract=1504568 or http://dx.doi.org/10.2139/ssrn.1504568

Glenn C. Loury

Brown University - Department of Economics ( email )

64 Waterman Street
Providence, RI 02912
United States

Brown University - Watson Institute for International and Public Affairs ( email )

111 Thayer Street
Box 1970
Providence, RI 02912-1970
United States

Young-Chul Kim (Contact Author)

Sangmyung University ( email )

7 Hongjidong, Jongro-ku
Seoul, 110-743

HOME PAGE: http://sites.google.com/site/youngchulkimhomepage/

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