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Identity Economics:
How Our Identities Shape Our Work, Wages, and Well-Being
George A. Akerlof & Rachel E. Kranton

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*G. A. Akerlof & **R. E. Kranton

A Q&A with George A. Akerlof & Rachel E. Kranton

What is identity economics and why does it matter?

The initiation ceremony at West Point; the riots in a New York State high school after judicially mandated busing; the Supreme Court case of a woman denied promotion at Price Waterhouse because of her masculine demeanor: In Identity Economics we use these and many other examples to demonstrate a basic principle. Who we are--our identity--goes hand in hand with our ideas of how we, and others, should behave.

Identity Economics introduces an easy, natural way to incorporate this principle into economic thinking. Identity economics matters because identity and norms influence the many large and small decisions we make every day--decisions that profoundly affect our work, wages, and well-being. This new economics builds a sturdier account of the economy and institutions. We understand how successful firms like Goldman Sachs operate; why U.S. education is ineffective; and why minority poverty is so persistent.

How should Identity Economics change the way economists view human behavior?

Let's consider an example: Work incentives. Economists have built a theory of work incentives, which has been applied widely in the U.S. financial industry. The theory is that a company achieves high worker performance by finding the right mix of wages and bonuses. But he who rides the tiger's back usually ends up inside: Overreliance on monetary incentives is dangerous, because workers who care only about their compensation will game the system. They will do what it takes to get the bonus, whether or not it is good for the firm.

Identity economics suggests a different key to work incentives: If employees identify with the firm, they will advance its goals even in the absence of monetary incentives. We see this in many companies and in the military, where what matters is people's belief in their firm's mission and goals and the camaraderie in their work groups. Identity economics gives a new focus to work incentives--on workers' identities, and norms, and on the social situation.

What is new about identity economics, and how does it fit into the larger field of economics?

Economists today consider a wide variety of reasons for economic decisions. We no longer explain economic behavior simply as coming from fully informed rational decisions about consumption and income. Economics is evolving and getting closer to understanding real people making decisions in real time. Information economics studies who knows what and when. Behavioral economics studies how psychological factors affect decision making.

Identity economics is the next step in this evolution. It emphasizes the social context. It brings day-to-day life into economics. It examines who people are, whom they are interacting with, and in what situation. Identity economics gives economists a new understanding of why people behave as they do. Economics pervades how policymakers, the public, and the press talk and think. The new perspective provided by identity economics should lead to a richer economics, and a more useful economics, for improving institutions and society.

(Photo credits: *University of California, Berkeley & **Duke University Photography)

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File created: 10/23/09

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