Discrimination Without Taste - How Discrimination Can Spillover and Persist

Abstract

Minorities in many countries have been found to have lower participation rates in self-employment. In this paper we introduce beliefs as a channel of persistent discrimination in self-employment despite perfect observability of individual ability. In the theoretical model individuals can become workers or entrepreneurs, where entrepreneurs require the establishment of productive relations. An exogenous shock causes a temporary taste for discrimination amongst few agents against a certain a group of individuals. The resulting discrimination negatively affects others through strategic complementarities in productive relations an individual requires to setup an enterprise. Discrimination precipitates across the economy through coordination failures driven by beliefs conditioned on observed discrimination. As a result the discriminated group might persistently have lower participation rates and payoffs from self-employment, even after no more taste for discrimination exists in society. We complement our theoretical model with an empirical exercise, indicating that beliefs about discrimination are the drivers of lower self-employment rates among Blacks in the US, rather than taste for discrimination. Co-authors and affiliation: Rajesh Ramachandran (Universitat Autònoma de Barcelona)