Discrimination as Focal Point: Markets and Group Identity

Abstract

This paper presents a theory of discrimination for markets in which there are complementarities between different tasks. It is shown that, in such a setting, even when groups are a priori identical, employers will end up discriminating against certain groups. Group discrimination serves the purpose of creating a focal point in a market game. In this model, the free market, far from curbing discrimination, nurtures it, and thereby creates the need for purposive policy intervention. It is argued that with the rise of technology the problem of discrimination as focal point will get more acute and we will have to think in terms of affirmative action or a system of taxation and subsidy to support groups that get excluded.

Keywords:

• discrimination
• externality
• affirmative action
• market failure

Acknowledgements

I began working on this topic when I was at the World Bank, and I am grateful to Tito Cordella and Jose Luis Diaz Sanchez for initial discussions and comments. This version of the paper was developed and written up in response to an invitation to deliver a keynote address at the session organized by the Association for Social Economics, at the American Economic Association Annual Meetings in Chicago, on 5 January, 2017. I am grateful to Quentin Wodon, Grace Lee and the participants at that Annual Meetings who asked questions and commented on the paper.

Notes

¹ See Arrow (1973, 1998), Phelps (1972), Spence (1974), and Stiglitz (1974).

² A polar case of this in a development context occurs in Kremer (1993).

³ Similar results were reported by Siddique (2008) who sent out applications in India using caste-based names. A paper by Thorat, Banerjee, Mishra, and Rizvi (2015) does a similar test for the home rental market in the National Capital Region, in and around Delhi, and record a similar bias against Muslim and Dalit applicants. For empirical studies, using other methodology, which nevertheless suggest pure racial bias, see Hamilton, Darity, Price, Sridharan, and Tippett (2015) and Pager, Bonikowski, and Western (2009). For some engaging research based in legal analysis, see Sander (2006) and Coleman and Gulati (2005).

⁴ A more complex and also more realistic model is developed in Basu (2015).

⁵ It is not a matter to go into here but this reference to commonsense and ‘reasoned intuition’ is not a casual side remark. I have argued at length elsewhere that for science to be useful we must combine it with these skills. Pure analysis of data or pure theory cannot help us help the world till we combine them with reasoned intuition (Basu, 2014).

⁶ Among the most notable findings on this are studies by Ambady, Shih, Kim, and Pittinsky (2001) and Hoff and Pandey (2006). See, also, Field and Nolen (2010), Hoff (2015) and World Bank (2015).