The Interaction between Statistical Discrimination and Taste Discrimination

This paper studies a job-assignment model incorporating taste discrimination and statistical discrimination simultaneously. We argue that when taste discrimination of some employers can affect the human capital investment behavior of a particular group of workers, other employers without taste discrimination will take this effect into account when hiring. Statistical discrimination thus arises naturally and is influenced by the degree of taste discrimination. We demonstrate that even if employers have ex-ante homogeneous beliefs about different groups, this belief can be transformed into negative stereotypes by taste discrimination. When such externalities exist, affirmative-action policies need to persist in the long run, and once removed, inequality still occurs. Moreover, we show that the specific direction of impact on statistical discrimination depends on the relative strength of the two effects: (i) Compared to other groups, stricter standards lead to lower investment incentives. (ii) Compared to non-investors within the same group, stricter standards lead to better identification of investments