Spontaneous Discrimination

Abstract

This paper considers a dynamic economy where agents repeatedly matched with one another and can decide whether to form a profitable partnership. Each agent has a physical and a social color. The social color of an agent is a signal about the physical color of agents in his partenrship history. Before an agent makes a decision, he observes the other's physical and social colours. Both the physical and the social color are payoff-irrelevant. We show that there are multiple equilibria some of them which involve discrimination. In addition, we show that every stable equilibria involves discrimination.