Nepotism, discrimination, and the persistence of utility-maximizing, owner-operated firms: comment.

• Author: Sharir, Shmuel
• Position: Response to Larry D. Singell, Jr. et al., Southern Economic Journal, vol. 63, p. 904, 1997

1. Introduction and Conclusions

   In a recent thoughtful paper in this Journal, Singell and Thornton (1997) (hereafter ST) deviate from the traditional literature on discrimination that originates with Becker (1971) and Arrow (1972a, b, 1973) in three significant respects.(1) This comment criticizes these deviations, showing that the ST astonishing result that discrimination will persist in a competitive labor market is unjustified, that their unconventional definitions of owners with unbiased and biased preferences contradict an established result of economic theory, and that their unique attempt at modeling discrimination and nepotism is problematic, too. The next three sections deal with these issues in the above order.

   The shortcomings of the ST analysis are due to two oversights: First, ST's crucial assumption that a positive externality arising from the ability to choose employees confers utility on the nonmarket goods discrimination and nepotism is unjustified. ST ignore the possibility that both discriminating and nondiscriminating owners may equally enjoy the process of choosing employees per se and that both types of owners (may) derive the same amount of utility from owning firms. Thus, discriminating owners lose an advantage that is wrongly conferred upon them by ST, and the ST result of the persistence of discrimination no longer holds. Second, ST overlook a basic result of economic theory that suggests that, in addition to tastes for discrimination (and nepotism), a crucial role in determining a desired composition of an owner's workforce is played by the differences in market wages of groups. Thus, ST's omission of the role of wage differentials is responsible for the shortcomings of their definitions of owners with biased and unbiased preferences and of their modeling of discrimination and nepotism as nonmarket goods.

   By their very nature, the issues of defining and modeling tastes for discrimination and nepotism take economists to uncharted waters. This is partly responsible for the shortcomings of the ST model that this comment identifies. Thus, in order that further modeling in this area will be based on more sound foundations than economists' speculations, it may be advisable that theories and empirical evidence that other social scientists, like social and industrial psychologists or sociologists, have to offer will be taken into account.

2. Persistence of Discrimination in Competitive Labor Markets

   ST claim that their "paper is the first to explicitly demonstrate how an owner operator who discriminates trades nonmarket for market consumption, and, thereby, can potentially compete and persist in a market with profit-maximizing firms" (1997, p. 916; emphasis added). The claim seems to be based on the ST modeling of discrimination as a nonmarket good yielding utility for a biased owner. As a result, they reach the astonishing result that discriminating firms will survive competition from otherwise identical but nondiscriminating firms.(2) This section suggests two arguments that cast doubts on the validity of the claim.

   The first argument focuses on ST's justification for modeling the nonmarket good discrimination as yielding utility. Such a justification is crucial since the ST result about the persistence of discrimination stands or falls with it. Unfortunately, ST do not explain their attribution of utility to the nonmarket good discrimination except for claiming that "both nonmarket goods [nepotism and discrimination] provide a positive externality that arises from the owners' ability to choose who they employ" (1997, p. 907; emphasis added). However, even if an ability to choose employees was viewed by owners as yielding a positive externality, this would have not implied that practicing discrimination (or nepotism) per se must yield a positive utility, too. An ability to choose employees is a precondition for practicing discrimination (and nepotism), but this does not imply that the utilities from these two types of activities are synonymous or related in any particular way. Owners may enjoy being bosses and the activity of choosing...