Journal Article

Statistical Discrimination with Peer Effects: Can Integration Eliminate Negative Stereotypes?

Shubham Chaudhuri and Rajiv Sethi

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 75, issue 2, pages 579-596
Published in print April 2008 | ISSN: 0034-6527
Published online April 2008 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2008.00468.x
Statistical Discrimination with Peer Effects: Can Integration Eliminate Negative Stereotypes?

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  • Demand and Supply of Labour
  • Wages, Compensation, and Labour Costs
  • Labour Discrimination

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We introduce peer effects in the costs of human capital acquisition into a model of statistical discrimination in labour markets. This creates a link between the level of segregation in social networks and racial disparities in job assignment and wages. We show that this relationship is characterized by discontinuities: there is a threshold level of segregation below which negative stereotypes become unsustainable, and steady-state skill levels can change dramatically. This change can work in either direction: skill levels may either rise or fall in both groups. Which of these outcomes arises depends on the population share of the disadvantaged group and on the distribution of the costs of human capital investments. We also examine the effects of affirmative action policies in the presence of peer effects and provide conditions under which such policies eliminate negative stereotypes.

Keywords: J23; J24; J31; J71

Journal Article.  9726 words.  Illustrated.

Subjects: Demand and Supply of Labour ; Wages, Compensation, and Labour Costs ; Labour Discrimination

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