Contract, Duration and Discrimination

Abstract

Racial residential segregation is a crucial aspect of the persisting racial inequality in the United States. We reexamine this enduring problem from a novel perspective, exposing the relationship between segregation and contract duration. In the housing context, the main contract duration decision involves the choice between buying (long duration) and renting (short duration). And this choice can affect, and be affected by, the racial composition of a neighborhood. If, because of discriminatory misperceptions based on mistaken stereotypes or discriminatory preferences, moving into a racially diverse neighborhood is perceived by some white residents to be a riskier or otherwise less preferred alternative, then (i) a white person moving into such a diverse neighborhood would be more likely to rent than buy; and (ii) a white person who is intent on buying, would be likely to choose a less diverse, predominantly white neighborhood. To empirically explore the relationship between contract duration and segregation, we apply two methodological approaches: First, we analyze rich survey data collected by the Bureau of Labor Statistics, which cover 8,984 individuals who were surveyed annually over a period of 17 years, including about their housing decisions. Second, we run online, incentivized trust-game experiments (N=763 across all experiments), where we study the relationship between duration choices and partner choices. Our findings suggest that short-duration, rental contracts may help reduce discriminatory outcomes. The shorter duration and the lower perceived risk of renting may encourage white residents to move into more diverse neighborhoods. And renting in a more diverse neighborhood may help dispel discriminatory misperceptions that are based on mistaken stereotypes or even eradicate discriminatory preferences, such that when the time comes to buy a house (long-duration contract) the search will include more diverse neighborhoods. If short-duration, rental contracts can be more conducive to racial integration, this provides a reason to soften the strong policy preference for homeownership. We also briefly explore the relationship between contract duration and other contractual design choices beyond the housing context.

Keywords: Contracts, Contract Duration, Discrimination, Residential Segregation

JEL Classification: D12,K11,K12,R21,R28