The Economics of Identity

By Roland Fryer

Oct. 7, 2024 4:47 pm ET

"Identity may be the most important economic decision people make." I read those words, written by Nobel Prize-winning economist George Akerlof and his collaborator Rachel Kranton, while sitting uncomfortably on the floor in the stacks at the Regenstein Library at the University of Chicago in 2001. It was both obvious and revolutionary: How you view your role in the world will affect your choices. Yet even the great economic thinkers hadn't incorporated identity–a concept well known to sociologists and psychologists–into a formal economic model.

In this polarized presidential election, seeing yourself as a "Trump voter" or a "Harris voter" doesn't simply reflect coldly calculated policy preferences or even behavior in the voting booth. It's an expression of identity that goes along with many other such expressions, from the car or truck you drive to the clothes you wear.

And it's subject to considerable social pressure. As Mr. Akerlof and Ms. Kranton explained, your identity can be buttressed, threatened, changed or influenced by others, not merely by your own preferences and decisions. Kamala Harris's repeated acknowledgment that she is a gun owner has little to do with policy and a lot to do with signaling her identity.

Social scientists often segment identity into three different types: personal (Who am I?), social (How do I want others to see me?), and collective (Who are we?). This categorization is helpful in understanding not only why people change their behavior to fit their identity, but also why they submit to peer pressure or pressure others when their behavior seems out of line.

In highlighting such dynamics, Mr. Akerlof and Ms. Kranton's innovative framework expands the traditional view of economic actors as simple, rational decision-makers. They imagine a set of social "categories" that people belong to and "prescriptions" describing a set of behaviors that align with a category. "Academic economist" would be a social category, and the prescriptions might include owning a "practical" car and wearing comfortable shoes. Splurging on a Porsche or a pair of Berluti loafers would not only cause a "real economist" to feel bad but immediately attract scorn from his colleagues. In traditional economics models, it's hard to rationalize why anyone cares so much about shoes.

The Akerlof-Kranton model posits that individuals gain from both material outcomes and actions that conform to their identities. In the labor market, workers are motivated by wages as well as by how well their jobs align with their identities. A corporate job might offer financial stability, but if it conflicts with an individual's identity as an environmentalist, the mismatch can lead to dissatisfaction and underperformance. In this vein, trying to train coal miners to be nurses may be futile.

Research by Dan Benjamin and James Choi provides a granular look into the mechanics of this phenomenon. Their studies, based on lab experiments that prime subjects to see different parts of their identities as salient, demonstrate that people may opt for lower-paying jobs if it means greater congruence with their social group, or might choose consumer goods that signal affiliation to a particular identity despite higher costs.

Building on these insights, my work with Steve Cicala and Jorg Spenkuch explores how people choose identities to begin with, based on their perceived comparative advantages within their social environments. This research diverges from traditional notions of comparative advantage, typically applied to countries or firms. I met with several well-known social psychologists across the country in the early days of this research. Many assumed that heredity largely dictated the identities toward which people gravitated.

We investigated the academic paths chosen by students in racially and socioeconomically diverse schools. We found that students often align their academic efforts with what they perceive to be their comparative advantages. A student who sees his strength in social leadership rather than academic achievement might choose to invest more in social endeavors. This decision is based both on where he excels and where he perceives the greatest return for his efforts in both self-fulfillment and, importantly, social recognition.

In other research, I found that black and Hispanic students with high grade-point averages tended to be less popular, which wasn't true for white students. This was in line with previous work suggesting that high-achieving black students were sometimes mocked for "acting white." By incorporating this kind of peer pressure, the Akerlof-Kranton framework also illuminates how gender norms can influence field-of-study choices. Women might avoid STEM fields not because of a lack of ability or interest, but due to societal norms dictating what is considered "appropriate" for their sex. Leonardo Bursztyn and his co-authors have found that single female business-school students "reported lower desired salaries and willingness to travel and work long hours on a real-stakes placement questionnaire when they expected their classmates to see their preferences," a phenomenon known as "acting wife."

The interplay of Mr. Akerlof and Ms. Kranton's identity economics, my findings on comparative advantage in social interactions, and Mr. Bursztyn's insights into peer pressure paint a comprehensive picture of how identity and social dynamics influence economic behavior. They underscore the critical role of social context in shaping our decisions and highlight the need for policies that consider these complex interactions.

In education especially, interventions should create environments in which diverse talents are recognized and valued, and where students feel encouraged to invest in areas aligned with their comparative advantages. There's a way to teach math that appeals to young women and ensures they understand that being a math nerd is completely consistent with their identities.

The economics of identity adds nuance to our understanding of human behavior. What seemed irrational under a traditional economic lens can often seem obvious once identity is taken into account. This simple addition to traditional economic models, described two decades ago, has greatly expanded our understanding of economic behavior and outcomes.

Mr. Fryer, a Journal contributor, is a professor of economics at Harvard, a founder of Equal Opportunity Ventures and a senior fellow at the Manhattan Institute.

Appeared in the Wall Street Journal on October 7, 2024. Read the original article here