Identity Economics

Chapter 1 of George Akerlof and Rachel E. Kranton's Identity Economics: How Our Identities Shape Our Work, Wages, and Well-Being, over at Princeton University Press:

Our work on identity and economics began in 1995, when we were both, by coincidence, based in Washington, DC. We had been together at Berkeley—George as a professor, Rachel as a graduate student. George then went to the Brookings Institution while his wife was serving on the Federal Reserve Board. Rachel was at the University of Maryland.

Identity Economics began with a letter from Rachel to George telling him that his most recent paper was wrong.8 He had ignored identity, she wrote, and this concept was also critically missing from economics more generally. We decided to meet. Quite possibly, we thought, identity was already captured in the economics of the time; perhaps it was already included in what we call tastes.

We talked for months. We discussed the research of sociologists, anthropologists, psychologists, political scientists, historians, and literary critics. We discussed the focus on identity: how people think they and others should behave; how society teaches them how to behave; and how people are motivated by these views, sometimes to the point of being willing to die for them. We worked to distill many ideas and nuances, to develop a basic definition of identity that could be easily incorporated into economics. And we saw that including identity would have implications for fields as disparate as macroeconomics and the economics of education.

This book builds an economics where tastes vary with social context. Identity and norms bring something new to the representation of tastes. Garden-variety tastes for oranges and bananas —to continue with the earlier example—are commonly viewed as being characteristic of the individual. In contrast, identities and norms derive from the social setting. The incorporation of identity and norms then yields a theory of decision making where social context matters.