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Identity Economics

Identity Economics: How Our Identities Shape Our Work, Wages, and Well-Being

George A. Akerlof
Rachel E. Kranton
Copyright Date: 2010
Pages: 192
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  • Book Info
    Identity Economics
    Book Description:

    Identity Economicsprovides an important and compelling new way to understand human behavior, revealing how our identities--and not just economic incentives--influence our decisions. In 1995, economist Rachel Kranton wrote future Nobel Prize-winner George Akerlof a letter insisting that his most recent paper was wrong. Identity, she argued, was the missing element that would help to explain why people--facing the same economic circumstances--would make different choices. This was the beginning of a fourteen-year collaboration--and ofIdentity Economics.

    The authors explain how our conception of who we are and who we want to be may shape our economic lives more than any other factor, affecting how hard we work, and how we learn, spend, and save. Identity economics is a new way to understand people's decisions--at work, at school, and at home. With it, we can better appreciate why incentives like stock options work or don't; why some schools succeed and others don't; why some cities and towns don't invest in their futures--and much, much more.

    Identity Economicsbridges a critical gap in the social sciences. It brings identity and norms to economics. People's notions of what is proper, and what is forbidden, and for whom, are fundamental to how hard they work, and how they learn, spend, and save. Thus people's identity--their conception of who they are, and of who they choose to be--may be the most important factor affecting their economic lives. And the limits placed by society on people's identity can also be crucial determinants of their economic well-being.

    eISBN: 978-1-4008-3418-1
    Subjects: Economics, Sociology

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Part One: Economics and Identity

    • ONE Introduction
      (pp. 3-8)

      ANN HOPKINS WAS HIRED in Price Waterhouse’s Office of Government Services in 1978. By all accounts, she was hardworking and diligent. She retrieved from the discard pile a State Department request for proposals and masterminded it into a contract worth approximately $25 million.¹ It was the largest consulting contract Price Waterhouse had ever secured, and her clients at the State Department raved about her work. In 1982 she was put up for partner, the lone woman among eighty-eight candidates.² But the promotion did not go through.

      What was deemed wrong with her performance? Colleagues complained about her deportment and the...

    • TWO Identity Economics
      (pp. 9-16)

      THIS CHAPTER INTRODUCES THE framework of identity economics. It shows the fault line between economics with and without identity and norms.

      Economists have a way of describing motivation: we describe an individual as having a “utility function.” This is a mathematical expression that characterizes what people care about. For example, a person may care about today’s consumption and about future consumption. That person then makes decisions to maximize her utility function. For example, she will choose how much to borrow and how much to save. This mathematics may seem like a roundabout way of describing motivation, but it turns out...

    • THREE Identity and Norms in Utility
      (pp. 17-20)

      WE NOW COME TO THE foundation of the book. This chapter shows precisely how we bring identity into economic analysis. All economic studies begin with a description of people’s motivations. Here we build a new, augmented, utility function, which includes identity, norms, and categories.

      Our utility function is simple and parsimonious. With just three ingredients—categories, norms and ideals, and identity utility—we capture how motivations vary with social context. Our procedure has two parts. In Part 1 we specify the standard components of utility: a person’s tastes for goods, services, or other economic outcomes. In Part 2 we specify...

      (pp. 21-26)

      BECAUSE THE GOAL of this book is to bring a new concept into economics, we must use the language of economics, which has many tacit conventions and metaphors. The language of economics is quite expansive; it should not be taken too literally. This postscript explains our use of various terms that take on meanings and connotations in economics that are different from common parlance and usage in other social sciences. (We provide these explanations for interested readers; others may want to skip to the next chapter.)

      In our analysis—as in almost all contemporary economics—people’s decisions are described as...

    • FOUR Where We Fit into Today’s Economics
      (pp. 27-36)

      IDENTITY ECONOMICS IS AT the frontier. We follow the trajectory of the past fifty years and bring economics closer to reality. We change economics by closely observing economic and social life and transforming existing theory.

      Consider four previous transformations. Fifty years ago, economic theory mostly considered two market structures: perfect competition and monopoly. But many industries—including the automobile, airline, and oil industries—do not fit either mold. To study such major parts of economies, economists adapted game theory. This entails the specification of who the actors are, what they know, the timing of their decisions, and their choice of...

  4. Part Two: Work and School

    • FIVE Identity and the Economics of Organizations
      (pp. 39-60)

      R-DAY IS THE FIRST day at the United States Military Academy at West Point. The new cadets strip to their underwear. Their hair is cut off. They are put in uniform. They then must address an older cadet with the proper salute and the statement: “Sir, New Cadet Doe reports to the cadet in the Red Sash for the first time as ordered.” New cadets must stand and salute, and repeat—again and again and again—until they get it exactly right, while being reprimanded for even the smallest mistake.

      What could the Army be trying to accomplish? Perhaps the...

    • SIX Identity and the Economics of Education
      (pp. 61-80)

      FROM 1969 TO 1971, riots between white and black students at an upstate New York high school brought all classroom instruction to a halt.¹ The school was closed ten separate times in the academic year 1969–70. There was a drastic reduction in learning that no current economics can capture. There had been no change in the factors that economic theories would typically tell us to look for: no budget cuts, no reduction in the number or quality of teachers, no degradation of the school physical plant, and no change in the economic incentives for students to graduate.² Just as...

  5. Part Three: Gender and Race

    • SEVEN Gender and Work
      (pp. 83-96)

      ONLY 7 PERCENT OF nurses in the United States are men. There are so few men in nursing that people use the phrase “male nurse” to describe one. The phrase not only describes a statistical anomaly; it also reveals a social contradiction that people recognize and discuss. In the movieMeet the Parents,it is a cause for consternation when the daughter brings home a male nurse as her prospective husband. There are advocacy groups for men in nursing;Male Nursing Magazinepromotes “male-friendly” nursing schools and offers tips on how to navigate the female-dominated profession.

      Regarding the predominance of...

    • EIGHT Race and Minority Poverty
      (pp. 97-110)

      MINORITY POVERTY IS our last, but not least, extended application of identity economics in this book. Black/white disparities are arguably the United States’ worst social problem. Their persistence is difficult to explain with current economic theories. With an identity model, the facts fall into place.

      We ask why, despite the civil rights movement and programs such as affirmative action, so many African Americans still fare badly.

      Since the civil rights movement, many African Americans have made significant economic gains. Between 1959 and 2001, the black poverty rate fell from 55 percent to 23 percent.¹ In 2001, more than half of...

  6. Part Four: Looking Ahead

    • NINE Identity Economics and Economic Methodology
      (pp. 113-120)

      IN THIS BOOK WE modify and broaden economic analysis to include identity. The stick-figureHomo economicusthat populated economic models beginning in the past century cared only about economic goods and services. Then Gary Becker (and followers) added all kinds of tastes to the utility function. This was followed by the addition of psychological aberrations from “rationality,” especially cognitive biases. Identity economics is a next step in this evolution.

      If identity is such a powerful concept, why has it taken us so long to get here? Why has not identity been part of economics before? This chapter offers some possible...

    • TEN Conclusion, and Five Ways Identity Changes Economics
      (pp. 121-130)

      WE HAVE USED identity economics to study work, school, and home. We have speculated on why economists have not previously considered identity. Here we look ahead and discuss five separate reasons, with illustrative examples, why identity enriches economic analysis.

      Identity affects individual behavior directly. This impact is most apparent in things people do that yield no economic benefit—often in activities that are costly, uncomfortable, and even injurious. Identity economics allows economists a simple representation of what could be labeled, literally, as self-destructive behavior, and actions that seem to make little economic sense.

      Body Art and “Bad Choices.”One of...

  7. Acknowledgments
    (pp. 131-134)
  8. Notes
    (pp. 135-152)
  9. References
    (pp. 153-172)
  10. Index
    (pp. 173-185)