Opportunistic Discrimination

Rick Harbaugh () and Ted To

No 2008-07, Working Papers from Indiana University, Kelley School of Business, Department of Business Economics and Public Policy

Abstract: When can you cheat some people without damaging your reputation among others? In a trust game between a firm and a series of individuals from two groups of different sizes, the firm has more incentive to cheat minority individuals because trade with the minority is less frequent and the long-term benefits of a reputation for fairness toward the minority are correspondingly smaller. If the majority is sufficiently large it gains nothing from a solidarity strategy of punishing opportunism against the minority, so the firm can continue doing business with the majority even if it cheats the minority. When some firms have a preference-based bias against the minority, the interaction with reputation effects gives all firms a stronger incentive to cheat the minority, and discrimination is the unique equilibrium for firms of intermediate patience.

Keywords: discrimination; trust; social capital; opportunism; reputation spillover (search for similar items in EconPapers)
JEL-codes: J71 J24 D63 L14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-lab and nep-soc
Date: 2008-11
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