Labor Market Discrimination, Imperfect Information and Self Employment.

This paper investigates the effects of labor market discrimination on the self employment returns of those discriminated against. It demonstrates that, in situations of imperfect information, labor market discrimination can "spill over" into markets relevant to self employment, creating seemingly discriminatory outcomes in these markets. Thus, credit market discrimination or consumer discrimination against minority entrepreneurs could arise as an indirect effect of labor market discrimination. The existence of these spillover effects is shown to have two important implications for self employment outcomes. First, labor market discrimination is likely to yield lower expected returns from self employment for individuals from discriminated against groups. Second, labor market discrimination may actually result in those discriminated against having less incentive to enter self-employment than individuals from other groups. Copyright 1992 by Royal Economic Society.