Sorting in the presence of misperceptions

Windsteiger, Lisa

doi:10.2139/ssrn.3260459

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Sorting in the presence of misperceptions

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Windsteiger, Lisa
Public Economics, MPI for Tax Law and Public Finance, Max Planck Society;

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https://ssrn.com/abstract=3260459
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Windsteiger, L. (2018). Sorting in the presence of misperceptions. Working Paper of the Max Planck Institute for Tax Law and Public Finance, 2018-08. doi:10.2139/ssrn.3260459.

Cite as: https://hdl.handle.net/21.11116/0000-0002-CE4A-4

Abstract

In this paper I develop a general model of how social segregation and beliefs interact. Sorting decisions will be affected by beliefs about society, but these beliefs about society are in turn influenced by social interactions. In my model, people sort into social groups according to income, but become biased about the income distribution once they interact only with their own social circle. I define "biased sorting equilibria", which are stable partitions in which people want to stay in their chosen group, despite their acquired misperceptions about the other groups. I introduce a refinement criterion – the consistency requirement – and find necessary and sufficient conditions for existence and uniqueness of biased sorting equilibria.