published in: Journal of Population Economics, 2007, 20 (3), 621 - 642
This paper presents several economic models that explore the relationships between
imperfect information, racial income disparities, and segregation. The use of race as a signal
arises here, as in models of statistical discrimination, from imperfect information about the
return to transactions with particular agents. In a search framework, signaling supports not
simply a discriminatory equilibrium, but a pattern of racially segregated transactions, which in
turn perpetuates the informational asymmetries. Minority groups necessarily suffer
disproportionately from segregation, since the degree to which transactions opportunities are
curtailed depends upon group size, as well as the informational “distance” between racial
groups. However, in some variants of the model, minority agents will self-segregate since
they face an adverse selection of majority agents who are willing to trade with them. We also
show that, if agents are able to learn from transactions, racial signaling can emerge with only
minimal assumptions about the ex ante importance of race.
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