Race, ethnic origin or sex as proxies for underlying characteristics and discrimination

"An important question is whether discrimination based on the use of race, ethnic origin or sex as a proxy for underlying characteristics in order to economize on information costs is justifiable under the legal standard for justified discrimination of article ll.—2:103. An efficiency case for justifying statistical discrimination can be made when the costs of forbearing it are higher than the burdens imposed under it. If the costs to forego a particular form of discrimination (in order to comply with non-discrimination laws) are high compared to the burden that that particular discriminatory practice brings, it might be a reason to justify the discriminatory practice on efficiency grounds.

What are the costs of prohibiting the use of sex, race or ethnical origin as a proxy for underlying characteristics? When the costs of making individual assessments are prohibitive, as they often are, prohibiting the use of the sex or race proxy will lead to the substitution of other proxies. And if the new proxies are less efficient than gender or racial or ethnical origin, — as they probably will be, because otherwise they would in all likelihood have been adopted without govemment prodding — prices for all customers will increase because the seller’s costs will be higher. In addition, legal suppression of efficient proxies could lead to an increase in error costs, leading to market inefficiency. To the extent that the prohibited proxy distorts the allocation of resources to those individuals of the discriminated group who have ‘desirable' characteristics. the replacement of that proxy by a new proxy will distort the allocation of resources to those individuals who are disadvantaged by the new proxy. The problem is shifted, not solved. It could only be solved by requiring sellers to ignore statistical correlations between particular traits and unwanted behavior. But if statistical correlations are to be ignored and the costs of making individual assessment are too high, seller may stop trying to distinguish between high-cost and low-cost customers and use a uniform pricing system instead. Under a uniform pricing system, high cost customers benefit at the expense of low cost customers. Some of the buyers who would have bought the product or service when prices or contract terms were differentiated according to their cost characteristics, will stop buying the product, resulting in market inefficiency. These costs need to be balanced against the burdens placed upon the victims of the discriminatory proxy that is the subject of the legal conflict. The primary victims of a firm's policy to use a proxy based on sex, race or ethnical origin are the members of these protected groups whose costs characteristics are not accurately predicted by the discriminatory proxy."

--- Economic Analysis of the DCFR: The work of the Economic Impact Group within CoPECL / Filomena Chirico, Pierre Larouche, Walter de Gruyter