Friday, April 21, 2006

Economics and Identity

Yesterday, I talked about incorperating identity into the economic framework. The bulk of the work on this topic has been done by George Ackerlof and Rachel Kranton. The original paper can be found here. Here is the abstract:

This paper considers how identity, a person'’s sense of self, affects economic outcomes. We incorporate the psychology and sociology of identity into an economic model of behavior. In the utility function we propose, identity is associated with different social categories and how people in these categories should behave. We then construct a simple game-theoretic model showing how identity can affect individual interactions. The paper adapts these models to gender discrimination in the workplace, the economics of poverty and social exclusion, and the household division of labor. In each case, the inclusion of identity substantively changes conclusions of previous economic analysis.

A popular summary from the NYTimes can be found here. A taste:

Conforming to one's self-image, to social expectations, or to a combination of the two, is one of the important ways people seek to be happy - to "maximize utility" in economic jargon. But while economic models have no theoretical reason to exclude the concept, economists have rarely considered it.

"The standard methodology in economics is to say that people care about objective things, and they don't care about subjective things" like how a good woman or a good man or a good Hawaiian should behave, the economist George A. Akerlof said in an interview. Economists may consider goods that money cannot buy, like having friends, but they tend to ignore attitudes or states of mind.

Yet social norms "are things that people really have very,veryy strong views about," Mr.Akerlof said. "Not only do they think that they should do certain things and not do other things, but they also think that their friends and associates and relatives should do some things and not do other things. That's what you don't see in economists' utility functions."

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