Description:
This paper examines the relationship between inequality and discrimination. Using a simple model of competitive signaling, this paper shows that income inequality induces discrimination against low-income group. The influence of income is intergenerational, from parents to the children. This establishes a strong correlation between parental income-status and their inheritable characteristics such as race that their children inherit. Then, the parental income status becomes identifiable through the children's race, which enables discrimination against the race of low-income group, racial discrimination. This type of discrimination induces welfare losses by reducing the opportunities to achieve higher productivity. The findings of this paper imply that (i) anti-discrimination policies may not be effective if they do not improve on income inequality and (ii) an effective means of reducing income inequality is to sever the parental influence that creates intergenerational chain of inheriting inequality