“Ghetto tax”: Poorer people prefer to pay more out of fear of being discriminated against

To measure how serious this phenomenon is, FGV EBAPE researchers carried out five experimental studies involving approximately 2,000 people between 2017 and 2022.
Public Policy
27 September 2023
“Ghetto tax”: Poorer people prefer to pay more out of fear of being discriminated against

For most people, entering a shopping mall, supermarket or hospital is just another consumer experience. However, for others, these places can represent spaces of discrimination. A study by Fundação Getulio Vargas’ Brazilian School of Public and Business Administration (FGV EBAPE), titled “Expected Socioeconomic Status-Based Discrimination Reduces Price Sensitivity Among the Poor,” analyzed the extent to which an individual prefers to pay more for a product in order to avoid being discriminated against because of their social condition.

“Poor people and racial minorities tend to be seen as threats within commercial environments and, as a consequence, are treated with prejudice,” says Yan Vieites, a professor at FGV EBAPE.

He points out that many FGV EBAPE studies have analyzed interactions between markets and consumers, making theoretical contributions and offering practical applications to real-life events. “We already expected to find that discrimination can alienate certain sections of society in environments such as banking institutions and hospitals. However, our research found that this phenomenon is so serious that these individuals prefer to pay more for a product or service to avoid the risk of experiencing any kind of prejudice,” he says.

The professor adds that this result goes against the received wisdom that the poorest will always prioritize the cheapest prices. “When cheaper products or services are offered in environments where people from the lower classes are at greater risk of suffering from discrimination, it opens up space for conflict between the management of scarce resources and psychological well-being – a concern that is not shared by wealthier people. In these contexts, the poorest people may prioritize psychological comfort even if they have to further restrict their already limited budget,” he explains.

The so-called “ghetto tax” means the phenomenon of poorer people having to pay higher costs because of prejudice. To measure how serious this ghetto tax is, researchers from FGV EBAPE went into the field to try to understand how this situation occurs in practice. To do this, they carried out five experimental studies involving approximately 2,000 people between 2017 and 2022.

The price of discrimination

This research was conducted with two groups: residents of Complexo da Maré, a set of 17 shanty towns in Rio de Janeiro that is home to more than 140,000 people; and residents of Leblon, an upscale neighborhood on the city’s south side. In both areas, passers-by were invited to take part in these studies.

In the first stage, the aim was to understand how the participants saw themselves as consumers. “For example, in one of the studies, we used the context of dining in a new restaurant. For many people, the decision-making process will take into account whether the food is good, whether the atmosphere is pleasant and so on. For others, they will also evaluate whether they will be discriminated against in this place. This keeps the poorest people away from these spaces, even if they are cheaper,” says Vieites.

According to the researcher, the focus of this study was on establishing this duality between the need to go for the cheapest option, managing limited resources and also psychological safety. “We first tried to understand what goes on in the head of a typical consumer in each of these neighborhoods,” he says.

While the first study focused on what was going on in people’s heads when making purchasing decisions, the others were aimed at understanding whether these people avoided consumer experiences out of fear of discrimination.

“We induced people to think of themselves as being a member of a high or low social class. To do this, they were asked the following question: when compared to people at the top of the social scale, with more schooling, more income and a more prestigious position, how do you see yourself? We asked them to express this on a scale from 1 to 10. We also asked them to compare themselves to people at the bottom of the social pecking order, with less education, income and occupational prestige.”

Using this information, the study manipulated what is called subjective perception of social class, meaning how individuals see themselves in society, regardless of how much they earn or their level of education. “When consumers make decisions, there is sometimes a difference between the more expensive and psychologically safer choice, i.e., without the risk of discrimination, and the cheaper option, which may pose a greater psychological risk,” he says.

Up until the second study, all these parameters remained hypothetical, but from the third phase onward, these concepts took on more practical configurations. After the participants had made the social comparison, they were assigned to two groups, in which they could choose two types of vouchers. With the first type of voucher, worth R$60, they could make a purchase in their own neighborhood, and with the other voucher worth R$70, they could make a purchase in another neighborhood.

Vieites points out that both establishments where they could buy any product with the voucher were located 20 minutes from where they lived. However, one establishment was within the same neighborhood, while the other was located in a different one.

Inter-group contact

The professor states that poorer people feel potentially threatened when consuming in environments that promote contact with people in different social positions. “We found that people who live in Maré don’t feel discriminated against in the area they live in, but they do feel discriminated against in other neighborhoods, while people from the city’s upscale south side don’t have this perspective of discrimination,” he says.

After establishing these situations in practice, the fourth study focused on the participants from Maré, and gave another voucher worth R$20 to each individual, with the condition that this amount must be used for a specific purchase, in this case a pair of flip-flops. The participants could buy this item in two locations: in a neighborhood store, where they would be charged R$18, or in a shopping mall store, where they would be charged R$16 for the same product.

“We changed the region where the purchase would take place. Now, Maré residents would have to choose between buying from a newspaper stand in Leblon or from a store located in a neighborhood of the same social class as Maré, such as Madureira,” Vieites says.

The researcher reveals that throughout the research, every time there was inter-group contact, such as Maré residents in an upper-class environment such as Leblon, they preferred to buy the more expensive option, as it would offer more psychological comfort. However, when they went to another neighborhood that didn’t involve inter-group contact, they felt safer buying the cheaper option, even if the purchase was made inside a shopping mall.

Affirmative action for diversity

The fifth study concluded the research by indicating possibilities for changing this situation. “At this stage, we returned to the hypothetical field and analyzed how these consumers who face discrimination see affirmative action by companies to combat this type of prejudice,” Vieites says.

The researchers selected a number of stores that talk publicly about inclusion and diversity, then the participants were presented with these stores and asked to choose the type of store they would be most likely to frequent.

Three types of establishments that work with diversity were classified. In the first, diversity is valued and the store emphasizes that each consumer is different in many ways, but they are all treated well. The second type of store says there is no difference between its customers and that everyone is treated equally.

“While the first type recognizes diversity, the second type downplays differences between consumers, but both are committed to treating all customers equally,” Vieites says.

The third type of store recognizes that discrimination takes place in commercial environments and it says it takes active measures, such as training employees, to prevent such discriminatory behavior from occurring.

“We had three types of arguments from the stores, but all prioritizing diversity. In relation to the three types of anti-discrimination approaches, people felt more comfortable and chose stores that worked with diversity, but not those that explicitly recognize the potential for discrimination experienced by the poorest people in commercial environments,” he says.

According to the professor, these statements may often sound merely like public relations and marketing, and the participants preferred the message of diversity rather than discrimination.

“Sometimes acknowledging discrimination so explicitly within a commercial environment can sound threatening to those who shop there. By bringing this issue up, your positioning as a store may sound more discriminatory, even if the company adopts measures to combat this problem. In this research, this type of action was not as effective as others at reducing the burden of discrimination at the time of purchases,” Vieites concludes.

To read the full study, click here.

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