Dundee Discussion Papers in Economics 088: A theory of discrimination based on signalling and strategic information acquisition

The paper develops a “signalling” based theory of discrimination where workers face different incentives for skill acquisition purely because of their group membership. Workers belonging to the disadvantaged group bear substantial signalling cost. The difference in signalling costs between groups is not due to any unexplained group heterogeneity but discriminatory information policy of the employer. Based on its belief about the group, an employer may not acquire relevant information about the workers of this group, even if such information were costless. It is shown that affirmative action policies can help in the presence of nonconvex signalling technology. Factors like co-ordination amongst workers, presence of a ‘dynamic’ labour market and sub-group formation seem to affect the nature and degree of discrimination.