Group Reputation and the Endogenous Group Formation

We develop a dynamic model that can explain identity switching activities among a stereotyped population, such as passing and selective out-migration, based on the group reputation model developed in Kim and Loury (2008). The more talented members of the population, who gain more by separating themselves from the masses, have a greater incentive to pass for an advantaged group with a higher collective reputation (incurring some cost of switching) or differentiate themselves by adopting the cultural traits of a better-off subgroup to send signals of their higher productivity to employers. We also show how an elite subgroup may grow autonomously out of the stereotyped population, when the most talented members adopt the cultural indices that are not affordable to other members of the population. Those cultural traits or indices are not necessarily relevant for productivity, but should be observable so that they can supplement the imperfect information about the workers' true productivity, as discussed in Fang (2001). We plan to merge this development with our previous work in Kim and Loury (2008) in the future.