Mogens Fosgerau

"Costly Screening and Categorical Inequality"

Abstract

When characteristics of individuals are imperfectly observed, markers of group membership such as ethnicity and gender can come to be used as proxies. The incentive effects of such stereotypes have previously been explored in the literature on statistical discrimination. This paper endogenizes the degree to which information is imperfect, which itself can be group-contingent. We consider a rationally inattentive screener who evaluates a pool of candidates composed of distinct and observable social categories. There is heterogeneity across categories along multiple dimensions, including the costs of being screened, the degree of bias faced in the screening process, and the manner in which costs of investment in skills is distributed. Candidates choose how much effort to invest in training before being screened, with a payoff in a post-screening market that depends on the screening outcome. We characterize equilibrium in this model, and use it to unify and extend several strands in the literature on categorical inequality, including statistical discrimination, prejudice, and social capital.

Keywords: Categorical Inequality, Statistical Discrimination, Identity, Rational Inattention, Bregman information

JEL Classification: D8, D9, J15, J7

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Contact persons: Mogens Fosgerau and Johan Lagerlöf