Price and prejudice

Economists distinguish between two different types of discrimination:

1. Taste-based discrimination, which involves bias against members of a particular group (this discrimination arises because of people's preferences for or against particular groups); and
2. Statistical discrimination, which involves treating people differently based on the group they belong to, because of differences in average characteristics between groups (this discrimination arises because of imperfect information about people, leading them to be treated as if all members of a particular identifiable group are the same).

As I noted in my recent review of Thomas Sowell's book Applied Economics, Sowell carefully explained that discrimination often imposes a cost on the person doing the discriminating. For example, if an employer discriminates against employees of a particular type, they may choose to employ others with lower productivity (and lower profitability for the employer) instead. The cost comes in the form of lower profits.

How much of a cost are discriminators willing to bear? That is the research question that is addressed in this 2018 article by Morten Hedegaard (University of Copenhagen) and Jean-Robert Tyran (University of Vienna), published in the American Economic Journal: Applied Economics (appears to be open access, but just in case there is an ungated version here). Hedegaard and Tyran use a field experiment among Danish high school students to estimate the willingness to pay to work with someone of the same ethnicity. Specifically, in the field experiment:

We hire 162 juveniles from secondary schools in Copenhagen, Denmark, with Danish-sounding and Muslim-sounding names to prepare letters for a large mailing and pay a piece rate. Workers are requested to show up for work twice in two consecutive weeks. In the first round, they work by themselves and we measure their individual productivity on the job. Before they come back for the second round, we call randomly selected workers on the phone and inform them that they will again do the same job but now have to work in teams of two. They are informed that they are paid the same piece rate as in round 1 and share earnings from team output in round 2 with the coworker. These randomly selected workers can choose whom to work with. The choice is between a candidate from the ethnic majority group and a candidate from an ethnic minority group. In treatment Info, we provide the decision maker with information about the individual productivity of the two candidates, i.e., the number of letters they prepared in round 1, and their first names as a marker of ethnicity... Rational decision makers who choose the less productive worker of the same ethnic type thus discriminate knowingly and deliberately.

Importantly, because Hedegaard and Tyran know the productivity of the workers from the first round. The sample is essentially split into threes. One person in each group of three is a decision-maker, and chooses which of the other two workers that they will work with in the second round. Hedegaard and Tyran ensure that the choice is between someone of the same ethnicity as the decision-maker, who has lower productivity, and someone of the opposite ethnicity, who has higher productivity. The 'price' of discrimination varies between decision-makers, depending on how more productive the opposite-ethnicity worker is than the same-ethnic worker that each decision-maker is offered. Hedegaard and Tyran can then test how much discrimination varies between decision-makers with higher and lower prices of discrimination. Based on their sample of 140 workers who completed both rounds, they find that:

...discrimination is common even at a substantial cost and that the tendency to discriminate is not different across ethnic types. We estimate that discriminators on average are willing to forego 8 percent of their earnings in round 2 to avoid a coworker of the other ethnic type. Our main result from treatment Info is that discrimination is highly responsive to the price of prejudice. Our best estimate is an elasticity of −0.9, i.e., we find that the probability to discriminate falls by about 9 percent if the price of discrimination goes up by 10 percent.

There is a lot to unpack there. First, people are willing to discriminate even if it costs them (which is consistent with Sowell's argument). Second, and a result that would surprise many people, ethnic majority and ethnic minority workers are equally likely to discriminate. Third, the elasticity is quite high - increasing the cost of discrimination reduces discrimination significantly.

Could it be that Hedegaard and Tyran are picking up statistical discrimination? That is, are the workers basing their decision on the average expected productivity of the workers of different ethnic groups? This seems unlikely, since both ethnicities are engaging in discrimination, and by definition both groups can't be less productive than each other (in fact, the Danish group is statistically significantly more productive). However, Hedegaard and Tyran explicitly test how important taste-based discrimination using a different treatment group, where the decision-makers were not provided with information about the round 1 productivity of the workers they could choose between (Hedegaard and Tyran refer to this as the 'NoInfo' treatment). They find that:

...statistical discrimination does not explain observed outcomes in NoInfo well. We find a large gap between observed earnings and earnings predicted by statistical discrimination (about 4 percent of total output). To account for taste-based discrimination, we use our estimate from treatment Info and find that it predicts well out of sample; about 40 percent of that gap is explained by animus-driven prejudice. Thus, our results suggest that prejudice is an important cause of ethnic discrimination in the workplace, and that it needs to be taken into account above and beyond the theory of statistical discrimination.

So, clearly there is a substantial amount of taste-based discrimination in this sample. To see just how much, consider that in the NoInfo experiment, 78 percent of decision-makers chose the same-ethnic worker, compared with just 38 percent in the Info experiment. Simply providing information about the price of discrimination was enough to reduce discrimination substantially.

Other than an interesting test of the relative important of the two types of discrimination, does this research provide some policy implications? It clearly demonstrates the existence of substantial ethnic bias or prejudice between workers. However, in terms of addressing the problem of discrimination this research suggests that, if there is some way to explicitly estimate the costs of discrimination, and make those explicit to decision-makers, discrimination could be reduced. Unfortunately, it is not clear how that would work as a solution in other real-world contexts.