The power of competition: reducing or reinforcing
discrimination?
Citation for published version (APA):
Schwieren, C. A. A., Vendrik, M. C. M., & de Gijsel, P. P. (2004). The power of competition: reducing or
reinforcing discrimination? METEOR, Maastricht University School of Business and Economics. METEOR
Research Memorandum No. 041 https://doi.org/10.26481/umamet.2004041
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Published: 01/01/2004
DOI:
10.26481/umamet.2004041
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The power of competition: reducing or reinforcing discrimination?
Christiane Schwieren
∗
(Universitat Pompeu Fabra)
Maarten Vendrik
(Universiteit Maastricht)
Peter de Gijsel
(Universiteit Utrecht)
Abstract
Economic theory argues that competition can diminish discrimination in the labor market,
while arguments from social psychology’s social-identity theory point into the opposite
direction. We ran two experiments to test the psychological predictions in an ‘economic’
setting. Participants were categorized artificially and played a team game, facing either strong
or weak competition. They further had to choose a new team member from either of the
categories, and pay for enactment of their preference. Only under strong competition, subjects
were willing to pay for their preference. The result gives qualified support to the prediction
from social-identity theory.
Keywords: discrimination, competition, social identity, experiment.
JEL Code: J71, C92
∗
Corresponding author. Universitat Pompeu Fabra, Department of Economics and Business, Ramon Trias Fargas
25 – 17; 08005 Barcelona, Spain. Tel.: +34 93 542 2688; Fax: +34 93 542 1746; e-mail:
christiane.schwieren@upf.edu
Acknowledgements: We want to thank Joep Sonnemans, Jos Theelen, Jens Grosser, and other members of the
CREED-team in Amsterdam for providing most valuable help conducting the experiments.
2
1 Introduction
Discrimination in the labor market is still surprisingly persistent. Because of this
persistence even in societies striving to eliminate it, a lot of research in economics, (social)
psychology, and related disciplines deals with this topic. One stream of research in economics
is interested in the question how product market competition influences discrimination. An
important argument is that under certain conditions competition has the power to diminish or
even stop discriminatory behavior [e.g., Becker (1957)]. However, a prominent social-
psychological theory, social-identity theory [SIT, e.g., Turner et al. (1986)], would rather
predict the contrary, but has not yet been applied in an economic context.
This paper incorporates SIT into a microeconomic model and presents two
experiments to test the predictions derived. Our model integrates Becker’s approach to
discrimination, statistical discrimination theory [e.g., Phelps (1972); Arrow (1973)], SIT, and
stereotyping research [e.g., Fiedler (2000)]. While economic approaches assume that
competition makes discriminatory behavior costly when no actual productivity differences
between groups exist, and thus will make it disappear in the long run, SIT makes the opposite
prediction. People are said to identify strongly with their ingroup when they are in a state of
self-relevant uncertainty
1
, and this can lead to strengthened discrimination against an
outgroup – especially if this outgroup is negatively stereotyped. Strong competition in the
product market can be such a situation of self-relevant uncertainty [see Vendrik & Schwieren
(2004)].
We describe two experiments conducted to test whether the ‘psychological’
predictions of the integrated model find any support in an economic setting. To our
knowledge this is a first attempt to directly analyze discrimination in the labor market
experimentally. In our experiments several teams were engaged in a task which represented
‘production’ of a product sold on a market. This market was either strongly competitive,
represented by low output prices, or weakly competitive, represented by higher output prices.
1
Self-relevant uncertainty is uncertainty about important things for the life and the self of a person, for example
having a job, being able to make a living, or succeeding in some important task.
3
In both experiments subjects were categorized artificially, but some information was
given about performance of the two categories, to make participants develop a stereotype of
each category (see below). Discrimination was measured by asking participants two things:
First, whether they had a preference for a person of their own or the other category as a new
member for their team. Second, we asked whether and how much they were willing to pay for
getting the preferred new member with a higher probability than 50:50 (which was the default
probability). Consistent with the predictions from social-identity theory, the experiments
found a payment in the strongly competitive situation only, but it tended to be in favour of the
outgroup.
The organization of the paper is as follows. First, section two shortly describes the
theoretical background and model underlying the experiments, and develops the hypotheses.
Section three describes the two experiments and discusses their results. Section four
concludes with a general discussion.
2 Theoretical background and hypotheses
2.1 Theories
The most influential economic theories on discrimination in the labor market are
Becker’s theory of employer discrimination and statistical discrimination theory (Phelps;
Arrow). Our research refers to both approaches, however assuming that there are no (longer)
actual differences in the distribution of productivities between the discriminated and non-
discriminated group. In Becker’s model, discrimination in hiring or wages is caused by a
‘taste for discrimination’ of the employer, which makes him willing to pay higher wages to
members of his preferred group to be able to work only with them. However, in a competitive
environment employers with such discriminatory tastes will have a cost disadvantage vis-à-
vis non-discriminating employers since the latter will hire (more) - equally qualified -
members of the discriminated group for lower wages. When increasing competition
suppresses profits to zero in the long run, this allows the non-discriminating employers to
drive the discriminating employers out of the market. Moreover, in a shorter run, an income
effect of falling profits (Comanor, 1973) induces discriminating employers to diminish their
discriminatory behavior.
4
However, employees may also have a taste for discrimination, and this discrimination
not necessarily disappears under competition in the product market. But many of today’s
firms are structured in teams, with flat hierarchies. This means that (high-skilled) employees
are also employers, taking part in hiring decisions and sharing in profits, i.e. being directly
affected by the situation of the firm. This may especially hold for jobs on the level of middle
or higher management. In such a situation employee discrimination is vulnerable to
competitive conditions in the product market as well. If there is imperfect information about
productivities of applicants, discriminatory tastes of employers and employees tend to be
rationalized into incorrect perceptions of a difference in average or variance of productivities
between the discriminated and non-discriminated groups (Arrow, p. 26). This renders the
discrimination statistical (i.e., it is discrimination against individuals because of (perceived)
differences between groups with respect to productivity), but since the perceptions are not
backed by actual differences in productivity between the two groups, this ‘weak’ variant of
statistical discrimination will be vulnerable to competition in the product market in the same
way as Becker’s discrimination.
Dealing with teams making hiring decisions, one is drawn to social-psychological
literature on discrimination. Social-Identity Theory [SIT, Turner et al.], and its extension
Self-Categorization Theory [SCT, e.g., Haslam et al. (1996)] are prominent social-
psychological theories dealing with discrimination. As they do not explicitly discuss labor
market situations, one has to extrapolate from their more general findings. Applying SIT to
labor market situations, the conclusion is very different from Becker’s. SIT states that self-
categorization in terms of a salient ingroup can, under certain circumstances, lead to
discriminatory attitudes and behavior. Circumstances leading to strong self-categorization are,
for example, situations of high self-relevant uncertainty, i.e. uncertainty about things, which
are important for a person, like profits for an employer. Situations of strong competition can,
in the eyes of an employee or employer, be perceived as giving rise to strong self-relevant
uncertainty, for several reasons. For the employer it is never sure whether he can stay in the
market – which is also (self-)relevant for his employees. Furthermore, we assume imperfect
information about productivities of employees, which constitutes self-relevant uncertainty in
situations of strong competition for the same reason – hiring badly performing employees can