Group Reputation and the Dynamics of Statistical Discrimination

Previous literature on statistical discrimination explained stereotypes based on the existence of multiple equilibria, in which principals have different self-confirming beliefs about different social groups (Arrow, 1973; Coate and Loury, 1993). However, the literature has not provided an account of where the principals' prior beliefs come from. Moreover, the static models dominating the literature do not offer relevant information about the dynamic paths that lead to each equilibrium. This paper develops a dynamic version of statistical discrimination in which economic players' forward-looking behaviors determine the dynamic paths to each equilibrium. Defining ``Group Reputation'' as the objective information shared by principals regarding the average characteristics of agents belonging to each group, this study identifies groups as advantaged or disadvantaged, based on their initial reputation states, and provides conditions by which a group can switch from one reputation state to another. By understanding this dynamic structure of reputation evolution, we examine the strategy that well-coordinated principals may voluntarily utilize to maximize their profits, helping the group in the reputation trap to improve its skill investment rate.