Knowledge that Transforms

A key question concerning affirmative action is whether the labor-market gains it brings to minorities can continue without it becoming a permanent fixture in the labor market. The authors argue that this depends on how the policy affects employers' beliefs about the productivity of minority workers. They study the joint determination of employer beliefs and worker productivity in a model of statistical discrimination in job assignments. The authors prove that, even when identifiable groups are equally endowed ex ante, affirmative action can bring about a situation in which employers (correctly) perceive the groups to be unequally productive, ex post.

The Home Mortgage Disclosure Act was enacted to monitor minority and low-income access to the mortgage market. The data collected for this purpose show that minorities are more than twice as likely to be denied a mortgage as whites. Yet variables correlated with both race and creditworthiness were omitted from these data, making any conclusion about race's role in mortgage lending impossible. The Federal Reserve Bank of Boston collected additional variables important to the mortgage lending decision and found that race continued to play an important, though significantly diminished, role in the decision to grant a mortgage.

The authors analyze the effects of R&D cartelization and research joint ventures on firms that engage in either Cournot or Bertrand competition in their product market. Research efforts, which precede production, are directed to reducing unit cost and are subject to various degrees of spillovers. It is shown that creating a competitive research joint venture reduces the equilibrium level of technological improvement and increases equilibrium prices compared to when firms conduct R&D independently. A research joint venture that cooperates in its R&D decisions yields the highest consumer plus producer surplus under Cournot competition and, in most cases, under Bertrand competition.