Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 562: Government-Mandated Discriminatory Policies

Hanming Fang () and Peter Norman ()
Additional contact information
Hanming Fang: Yale University, Postal: Department of Economics, P.O. Box 208264, New Haven, CT 06520-8264, USA
Peter Norman: University of Wisconsin-Madison, Postal: Department of Economics, 1180 Observatory Drive, Madison, WI 53706-1393, USA

Abstract: This paper provides a simple explanation for why some minority groups are economically successful, despite being subject to government-mandated discriminatory policies. We study an economy with private and public sectors in which workers invest in imperfectly observable skills that are important to the private sector but not to the public sector. A law allows native majority workers to be employed in the public sector with positive probability while excluding the minority from it. We show that even when the public sector offers the highest wage rate, it is still possible that the discriminated group is, on average, economically more successful. The reason is that the preferential policy lowers the majority's incentive to invest in imperfectly observable skills by exacerbating the informational free riding problem in the private sector labor market

Keywords: Discrimination; Informational Free Riding; Income Distribution

JEL-codes: D31; J45; J71

25 pages, August 15, 2001

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