Discrimination Without Taste - How Discrimination Can Spillover and Persist

In this paper we introduce coordination failures driven by beliefs as a channel of persistent discrimination in activities characterized by interdependency in payo ffs and interlinkages across markets. The model shows how discrimination can persist under perfect observability of individual ability, when taste for discrimination has died out, and in the absence of discriminatory social norms, conditions normally assumed in the literature. For the case of self-employment the main result shows that individuals of the discriminated group will have lower participation rates and lower payo ffs despite equal ability, leading to an overall welfare loss. Empirically we find that beliefs about discrimination are a consistently signi ficant factor in the estimation of self-employment rates of blacks in the US. The paper highlights the importance of distinguishing between the various channels of discrimination, as understanding the mechanism behind it is crucial to devising appropriate policy