Category Archives: Discrimination

THE NATURE AND EXTEND OF DISCRIMINATION IN THE MARKETPLACE

THE NATURE AND EXTEND OF DISCRIMINATION IN THE MARKETPLACE: EVIDENCE FROM THE FIELD

J. A. LIST

The Quarterly Journal of Economics Vol. 119, No. 1 (2004) pp. 49-89

Principal Research Question and Key Result Do minorities experience discrimination in a particular bilateral bargaining market (the market for baseball cards at baseball card fairs)? If so is this prejudice based, based on different bargaining ability, or based upon statistical discrimination? The results of these various experiments indicate that minorities do experience discrimination in the market place, but that this discrimination is based upon cognizant statistical discrimination rather than prejudicial/taste based discrimination.

 

Theory Discrimination can come in a variety of different forms. Taste-based discrimination is discrimination based upon prejudice, and is considered to be morally wrong – i.e. treating two otherwise identical people differently simply because you have a distaste for the race of one of them. Discrimination could also be statistical which means that people use observable characteristics about an individual in order to make inferences about unobserved characteristics that determine different levels of treatment. For example, if women generally have an unobserved tendency to drive harder bargains when negotiating a sale, then potential buyers may be more willing to strike a deal with them that erodes their surplus, than they are with men. Thus different sales prices for men and women would not be evidence that men were being discriminated against based upon their sex, but rather that their sex was a proxy for some other characteristic that determined the outcome (being rather weak negotiators).

 

Motivation In general regression analysis of existing data is restricted by the unstated hypothesis that the unobserved characteristics of majority and minority individuals are the same, whereas they may not be. This means that such studies cannot differentiate between taste based and statistically based discrimination. In general it is argued that only differences in treatment based upon taste should be considered true discrimination.

 

Data The data are drawn from a series of experiments that were performed at three baseball card shows in the same geographic area.

Experiment I and II

Participants were males, females and minorities aged 20-30, and men over 60. They entered the market to purchase a specific card for as little as possible from a randomly selected dealer who did not know he was part of an experiment. Participants did not know it was a study on discrimination, and they were also guaranteed a $10 fee irrespective of how much below the reservation price they managed to secure the card. This happened twice, once with a reasonable reservation value, and once with one too low to guarantee them participation in the market.  As there were 120 participants, this yielded 240 observations. This is experiment (B) for Buying. A similar treatment was to do with selling (S) whereby participants were asked to sell a card. 60 such participants approached 5 dealers each yielding 300 observations. No individuals participated in more than one treatment. In order to check if they had had prior dealings the subjects were asked, and only 3-5 had. The bargaining process was timed.

Data about the dealers that were approached by the participants was also collected.

Experiment III

This is a dictator game, where the dealers in question were given $5 and told to divide it anonymously between themselves and one of the participants (who was not present). The only information the dealer received was what group the individual he was sharing with belonged to. The design was such that no one could know which dealer made what offer in order to allow them to behave as naturally as possible. This can used to see if the dealers that participated have taste based discrimination or not.

Experiment IV

Here both participant and dealer know they are part of an experiment. The buyers are given a card with a reservation price on, that they must try to get below. This is done 5 times with different dealers and different prices. In half of the interactions the dealer understands that the reservation price is randomly assigned, and in the other half this is not stated (such that he really believes that they are arguing for their genuine reservation price). The dealers all have target too, so the amount of dealer surplus that is lost in the bargaining process is quantified.

 

Strategy

Pij = βXij + αj + εij

Where P is the initial/final price offered by dealer j made to individual i, X are controls for years of experience in market, education, transaction intensity (how many that have made previously), income dummy, past experience dummy etc. Alpha is a dealer fixed effect and epsilon is the error term. 

Results Experiment I and II

(B): minorities received higher initial and final prices when selling (summary stats). The regression tends to confirm the summary stats. Differences are large and significant for women and men over 60, but are positive though insignificant for non-white males.

(S): the effects of discrimination were much more pronounced when selling, with all minorities experiencing significant discrimination that amounted to a nearly 30% reduction in initial offer prices. These differences are attenuated but not lost as a consequence of the bargaining process. In both experiments years of experience is significant. He splits the results up into whether the individual is experienced in dealing or not and finds that whilst the effects remain for inexperienced dealers (although again not significantly so for non-white men in experiment B), for individuals with lots of dealing experience the effects are attenuated by the bargaining process such that final offer prices are pretty similar. However, minorities have to spend longer bargaining to get to that position. These results say nothing about the type of discrimination that is occurring.

He uses data on the dealers approached to regress a measure of discrimination based on different offers they make, on the observable characteristics, and finds that the level of discrimination rises with the amount of experience a dealer has.

Experiment III

The only statistically significant difference in the offer in the dictator game is that women are in general offered slightly more, which fits with other psychological studies where the men are the dictators, and possibly reflects some kind of chivalry impulse. This indicates that dealers do not exhibit noneconomic taste based discrimination.

Experiment IV

He runs an OLS with individual dealer lost surplus on dummies for the group to which the buyer belonged, and dummies indicating which experimental session the bargain had occurred. The results indicate that majority buyers outperform minority buyers when dealers do not know that reservation values are determined randomly, but that minority and majority buyers perform similarly when the dealer knows that the reservation price is randomly allocated. This indicates that discrimination only occurs when the dealer believes that he can get a better price for his commodity, as when he knows that reservation prices are random, he is willing to lose an equal amount of his surplus to each group of buyers. This is consistent with the idea that dealers knowingly statistically discriminate.

This is tested further. If there is statistical discrimination then dealers that know that certain groups have a larger variance of reservation prices will tend to offer higher initial/final offers to those groups for whom the variance is relatively bigger, in an attempt to secure the best deal for himself when selling his goods. Information about the willingness to pay for a certain card was collected from participants at the show by getting them to put a bid in for a card (and being told that if theirs was the best bid they would receive the card although they would have to pay for it). Similar information was collected on willingness to accept, potential seller wrote down the least offer they would take for the card and were told that one person would randomly win the card, and if that person happened to be the lowest offer, they would also receive cash to the value of the next lowest bid. When summarized these data indicate that minority reservation price distributions are more widely dispersed than the majority reservation prices.

The various variances by group were then taken into the field, and dealers were asked to match reservation price bands to the different groups to test whether they accurately perceive the different distributions. This experiment indicated that dealers do recognize different price distribution but experienced dealers are better at doing so.

In sum results suggest that there is statistical discrimination. Dealers seem to know that minorities have different willingness to pay/accept prices, and they use their identifiable traits (race/sex) as proxies for the unobserved reservation price potential, and this explains the differential treatment of the groups.  

 

Robustness This whole article is robustness
Problems Sample size is pretty small which may prevent him from finding stronger more precisely estimate results. Also there could be some sample selection effects. For example that experienced minorities can achieve similar results to majorities if they bargain for longer may not be a real world effect, if they are more likely to press for a negotiated deal knowing that they are part of an experiment that is concerned with selling/buying baseball cards. In real life they might just walk away.

External validity is not very high. This is a quite specific market, that does not bare a huge amount of similarity to markets in general. For example very little experience is needed to deal in the market for groceries, or electricity, whereas for baseball cards clearly knowing what the value of the product is is itself the product of a certain amount of experience. It is hard to generalize these results.

It is not clear why nonwhite males should not experience significant effects in the buying experiment.

 

Implications In seeking to address social policy to questions of discrimination it is important to understand what the sources of the discrimination are in order to best design policy. Given the intricate nature of this experiment is the means of identifying the different channels that discrimination can operate through, it is hard to see how it could be replicated to other types of environment such as schooling or labour market outcomes. Perhaps the best that can be hoped for from those studies is an overall finding of discrimination whether it be taste or statistical. Although the taste based discrimination is generally thought to be the morally reprehensible one, we might further question whether just because women are prepared to accept a lower wage, an employer should be allowed to exploit this and pay her less than a male colleague, which is essentially what statistical discrimination is. If we decide that this is not acceptable then the regression type methods become more useful.

 

 

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