Rationally Inattentive Statistical Discrimination: Arrow Meets Phelps
When information acquisition is costly but flexible, a principal may rationally acquire information that favors "majorities" over "minorities." Majorities therefore face incentives to invest in becoming productive, whereas minorities are discouraged from such investments. The principal, in turn, rationally ignores minorities unless they surprise him with a genuinely outstanding outcome, precisely because they are less likely to invest. We give conditions under which the resulting discriminatory equilibrium is most preferred by the principal, despite that all groups are ex-ante identical. Our results add to the discussions of affirmative action, implicit bias, and occupational segregation and stereotypes.
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