Collective Reputation and the Dynamics of Statistical Discrimination

38 Pages Posted: 27 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 practices 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, D82, J15, J70

Suggested Citation

Loury, Glenn C. and Kim, Young-Chul, Collective Reputation and the Dynamics of Statistical Discrimination (March 31, 2014). Watson Institute for International Studies Research Paper No. 2014-10. Available at SSRN: https://ssrn.com/abstract=2429298 or http://dx.doi.org/10.2139/ssrn.2429298

Glenn C. Loury (Contact Author)

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

Sangmyung University ( email )

7 Hongjidong, Jongro-ku
Seoul, 110-743

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

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