Taste-based or Statistical Discrimination: The Economics of Discrimination Returns to its Roots

TLDR: The authors review the evolution of empirical work on discrimination and discuss why traditional regression-based approaches neither convincingly measure market discrimination nor disentangle the relative importance of animus versus statistical discrimination in explaining such discrimination as exists.

Abstract: We briefly review the evolution of empirical work on discrimination. We discuss why traditional regression-based approaches neither convincingly measure market discrimination nor disentangle the relative importance of animus versus statistical discrimination in explaining such discrimination as exists. We describe the development of modern correspondence studies. We argue that these studies have the promise to credibly identify the presence of discrimination if not its magnitude, can inform us about the underlying mechanism generating discrimination and can also point to avenues for new theoretical and empirical work on discrimination. We discuss two articles with exemplary applications of these new methods. At least since Becker (1957), economists have been deeply interested in the presence of discrimination in markets. In the 1970s and into the 1980s, there was an active debate in the literature about whether discrimination was better described by Becker’s taste-based discrimination model, or by Arrow and Phelps’ statistical discrimination model. That debate gave way to a theoretical literature that advanced each model separately and to an empirical literature focused on documenting the presence of disparities and the effects of policies designed to counteract discrimination. Only recently has the literature returned to the question of whether taste-based or statistical discrimination is a more appropriate description of the phenomenon. The two articles that follow are good examples of the move towards an understanding of the mechanisms underlying discrimination. In this article, we attempt to place the literature’s recent direction into context and to show how it is a natural place for economists studying discrimination to arrive, given where we began. In The Economics of Discrimination, Becker explored ways in which individual tastes for discrimination might interact in a market setting to produce discriminatory outcomes for market participants. Becker described three models, each considering a different source of discriminatory tastes: employers, co-workers and customers. The Economics of Discrimination included deep insights about discrimination. Becker clarified the distinction between individual tastes for discrimination and market discrimination, he clarified the difference between segregation and market discrimination and he showed how the market might produce incentives for those with discriminatory tastes to avoid interaction with those towards whom they harbour animus. 1