The Economics of Identity – how everything is affected by our sense of self


How does identity shape our behavior? Akerlof und Kranton (2000) propose a new concept of utility by incorporating the psychology and sociology of identity into an economic model of behavior. Their utility function represents different social categories and postulates how individuals belonging to these categories should behave. This approach can be applied to nearly any form of individual interaction.

The main idea of this concept is that every person has a personal sense of self – his identity. There are many different social categories with different physical attributes and prescribed behaviors to which a person is assigned. Akerlof und Kranton (2000) begin with gender which will be explained as an illustrative example in the following. According to them, every person in society is assigned to one abstract social category which is either a “man” or a “woman”. An individual can then behave in a way which is prescribed for his social category or violate one of these prescriptions. Behaving in the sense of the social category affirms one’s self-image while a violation “evokes anxiety and discomfort in oneself and in others”. Thus a given or chosen form of identity connected with actions, specific for the social category, can change a person’s own profit, but the profits of the other members of his social group as well.

This concept could help us to understand aspects of economic behavior which cannot be explained by the commonly used approaches – even behavioral economics. Akerlof and Kranton argue that the concept of identity economics can, for example, explain behavior that seems to be detrimental, such as having a specific physical body image. Furthermore, this concept evokes a new form of externality problem. Meaning, that someone’s action can evoke responses in others. That is behaving according to your own identity may disturb people having other ideas on how to act. They also argue that identities could explain how preferences change. This could happen due to advertisement, a new stage of life or peer group. Thus the choice of school, place to live or activities in the free time can influence identity and thus preferences. But not every part of identity can be chosen, there may be cases where an individual is constrained by the society, because of its ethnicity or other remarkable characteristics. Thus the choice of the own identity and the limits a person may face in making that decision are very important determinants in economics which have not been considered in the most economic analysis so far.

One extension of their model deals with the economics of social exclusion and poverty. In that case, the predetermination of belonging to some social minority restricts individuals in their choice of identity. Hence belonging to some minority and trying to behave and to identify as someone from the dominant culture may involve different difficulties. One may be to become accepted while possibly evoking negative stereotypes in the dominant culture. Another, probably more important, difficulty is the potential suffering of one person trying to fit into another culture by changing their identity. “This social exclusion may create a conflict: how to work within the dominant culture without betraying oneself” (Akerlof und Kranton 2000).

To conclude the concept of identity influencing individual decision-making yields many options to understand how to prevent social exclusion and to design policies for reducing poverty effectively.



Akerlof, George A.; Kranton, Rachel E. (2000): Economics and Identity*. In: Quarterly Journal of Economics 115 (3), S. 715–753. DOI: 10.1162/003355300554881.

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