Consider the following scenario and respond to the questions.
Imagine that society can be divided into Xs and Ys, and X and Y refer to people with different physical characteristics or other characteristics that can easily be observed or discovered, such as race, ethnicity, immigrant status, or religious practices. Within each group, there are good and bad types. Assume that the Xs are wealthier and more politically powerful than the Ys perhaps because they are more numerous, or because they are descended from a politically powerful group. Under such conditions, it is possible that members of X will signal their cooperative propensity by discriminating against the Ys. Discrimination functions as a signal because it is costly (one gives up the opportunity to do business or socialize with Ys who are good types), and because conspiracy theories based on traditional fears of people with physical or cultural differences, or people who are recent arrivals, provide a focal point: given these beliefs, those who discriminate against outsiders will appear to be loyal to the insiders. In equilibrium all or most Xs will avoid Ys (and those who do not will be ostracized by the Xs and may seek refuge with the Ys), and almost all Y’s will avoid the Xs, falling back on each other when it is desirable to enter cooperative ventures. Finally, we assume that because of their political and economic dominance, members of X control the government, including the criminal justice system.
