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Naked Economics: Adverse Selection and Discrimination
In Chapter 5, Wheelan considers the importance of economic information and the consequences of its imbalance, which brings along the sensitive issue of discrimination. Adverse selection can happen because of the imbalance of information, and it presupposes the increase of the least profitable proposals coming from those who possess more data. Those who do not possess it, attempt to protect themselves from these adverse options.
For example, a woman can become pregnant and leave the company at an inconvenient moment. Therefore, a female employee is a less attractive option than a male one. At the same time, a black man is statistically more likely to have a criminal record than a while one; if the employer does not have the access to the record, he or she might avoid hiring black people. This situation results in discrimination that can be termed as rational or statistical one (Wheelan 107). According to this logic, black women might have problems finding a job. In reality, this situation is not unlikely to occur.
Indeed, rational discrimination is among the many things that keep discrimination in our society from reducing. At the same time, it is not the only factor, which is why the claim that adverse selection explains discrimination needs to be specified. The adverse selection might be capable of partially explaining discrimination in particular cases. Indeed, even the case of workplace discrimination is not always completely explained by adverse selection prevention. Similarly, even racial profiling might in effect stem from a police officers irrational racism.
Rational discrimination is harmful. For example, employers must understand that their actions impose a cost on other employers (especially white males) by discrediting them. Similarly, racial profiling discredits police, which is extremely unfavorable for its interactions with the community.
Also, such actions cause direct harm to discrimination victims and society as they contribute to discrimination at large. As a result, few things can justify discriminatory adverse selection prevention, and discriminatory practices that are accepted by the society should not be regarded as justifications. As Wheelan shows, one of the justifications is inadequate laws. In particular, he mentions the idea of curtailing access to criminal history records (Wheelan 108).
The problem consists in the fact that this solution is not aimed at the issue of discrimination against people with criminal records; it is aimed at hiding this issue and denying its existence. While our justice system attempts to rehabilitate and reintegrate people with criminal records, the society (armed with rational discrimination) does everything to prevent it, which leads to personal and community-related adverse outcomes.
Rational discrimination is understandable in every case including that of health insurance companies and people with chronic diseases. It is still discrimination, though. I would conclude that adverse selection might explain but cannot justify discrimination. The complexity of the issue demands solutions, and Wheelan proposes determining the rational ground for rational discrimination and eliminating it.
For example, the employer can be ensured that an employee has no criminal record (which is discrimination of its own). This fact can be regarded as an advantage of rational discrimination: unlike the irrational one, it can occasionally be eliminated or mitigated. Unfortunately, as Wheelan shows with examples of terrorism, crime, and healthcare, not every issue has a simple solution.
Works Cited
Wheelan, Charles J. Naked Economics. New York, New York: W.W. Norton & Company, 2010. Print.
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