The Harm in Social Stigma: An Educational Rat-Race Game

Abstract

I consider a variation of Michael Spence's job market signaling game with a continuum of actors and discrete levels of education. I analyze the harm in social stigma by examining the effect of introducing a negative shock to the utility levels of the least educated members of society, compared to a world without stigma. When a stigma attaches to the bottom group, every individual - educated or not - in society suffers a welfare loss due to either lowered wages or higher signaling costs. This reduction in social welfare is due to the externality arising from the rat-race aspect of education. Significantly, in many instances the welfare loss from social stigma is not simply redistributed across all individuals but is magnified at equilibrium. Finally, I modify the model to consider the harm in social prestige and conclude that society's intangible reward for the social elite, too, may bring about overall welfare loss.