Self-fulfilling regression and statistical discrimination

Hayashi, T. (2019) Self-fulfilling regression and statistical discrimination. International Journal of Economic Theory, 15(3), pp. 289-295. (doi: 10.1111/ijet.12190)

Abstract

This paper provides a simple model which explains that statistical discrimination can arise in a purely self‐fulfilling manner. The story is as follows. (i) At the point of hiring, employers cannot observe workers’ productivities but can observe only their signals, such as test scores, and under perfect competition they pay for expected labor productivity conditional on signal observation, based on their belief about return to signal. (ii) Given the employers’ belief, workers choose an effort level, which affects the joint probability distribution over productivity–signal pairs. (iii) In equilibrium, the employers’ belief proves to be statistically consistent. We show that there may be multiple equilibria, and that equilibrium selection has nothing to do with economic fundamentals.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Hayashi, Professor Takashi
• Authors: Hayashi, T.
• College/School: College of Social Sciences > Adam Smith Business School > Economics
• Journal Name: International Journal of Economic Theory
• Publisher: Wiley
• ISSN: 1742-7355
• ISSN (Online): 1742-7363
• Published Online: 06 September 2018
• Copyright Holders: Copyright © IAET 2018
• First Published: First published in International Journal of Economic Theory 15(3):289-295
• Publisher Policy: Reproduced in accordance with the publisher copyright policy