Spontaneous Discrimination

This paper considers a dynamic economy in which agents are repeatedly matched with one another and decide whether to enter into profitable partnerships. Each agent has a physical colour and a social colour. The social colour of an agent acts as a signal about the physical colour of agents in his partnership history. Before an agent makes a decision, he observes his match’s physical and social colours. Neither the physical colour nor the social colour is payoff-relevant. We identify environments where, in some equilibria, agents condition their decisions on the physical and social colours of their potential partners. That is, they discriminate. The main result of the paper is that, in these aforementioned environments, every stable equilibrium must involve discrimination. In particular, the colour-blind equilibrium is unstable.