Rationally Inattentive Statistical Discrimination: Arrow Meets Phelps

Federico Echenique and Anqi Li

Journal of the European Economic Association, 2025, vol. 23, issue 5, 1712-1742

Abstract: When information acquisition is costly but flexible, a principal may rationally acquire information that favors one group over another. The former group faces incentives to invest in becoming productive, while the latter is discouraged from such investments. In turn, the principal largely overlooks the productivity differences between groups and primarily promotes the invested group, unless the underinvested group surprises him with a genuinely outstanding outcome. We show that, when attention costs are intermediate, investment costs are low, and investments are likely to succeed, the discriminatory equilibrium is the most preferred by the principal, despite all groups being ex-ante identical. Our results inform the discussion of affirmative action, implicit bias, and occupational segregation and stereotypes.

Date: 2025
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