Akerlof and Kranton on identity economics

George Akerlof and Rachel Kranton have collaborated for over ten years on a simple idea: is it possible to introduce the concept of social identity into the formal mechanics of mainstream economics? Can "identity" complement "interest" in the calculation of rational individual behavior? Their ideas were developed in several important articles: "Economics and Identity" (link), "Identity and the Economics of Organizations" (link), and "Identity and Schooling" (link).  These earlier articles are all available on the Internet.  Much of their thinking is pulled together in a recent book, Identity Economics: How Our Identities Shape Our Work, Wages, and Well-Being.

So what is their theory of identity and rational behavior?  "Economics and Identity" (2000) is a good place to begin. Akerlof and Kranton argue that there are common social phenomena that are not well explained by the assumption of narrow economic rationality, but that are more amenable to treatment with a theory of individual choice that incorporates the factor of social identity. They include "ethnic and racial conflict, discrimination, intractable labor disputes, and separatist politics" as examples of social behavior that "invite an identity-based analysis" (716).

Here is how they incorporate the behavioral mechanism of identity into an actor model, using the example of gender identity:

Everyone in the population is assigned a gender category, as either a ‘‘man’’ or a ‘‘woman.’’ Following the behavioral prescriptions for one’s gender affirms one’s self image, or identity, as a ‘‘man’’ or as a ‘‘woman.’’ Violating the prescriptions evokes anxiety and discomfort in oneself and in others. Gender identity, then, changes the ‘‘payoffs’’ from different actions. (716-717)

In other words, they incorporate identity into the rational-actor model by hypothesizing that one's identity alters one's utility function or preferences:

In the next section we propose a general utility function that incorporates identity as a motivation for behavior. (717)

And here is the utility function they produce (719):

We propose the following utility function: 

(1) Uj = Uj(aj,a_j,Ij). 

Utility depends on j’s identity or self-image Ij, as well as on the usual vectors of j’s actions, aj, and others’ actions, a_j. Since aj and a_j determine j’s consumption of goods and services, these arguments andUj(·) are sufficient to capture the standard economics of own actions and externalities. 

Following our discussion above, we propose the following representation of Ij: 

(2) Ij = Ij(aj,a_j;cj,epsilonj,P). 

A person j’s identity Ij depends, first of all, on j’s assigned social categories cj. The social status of a category is given by the function Ij(·), and a person assigned a category with higher social status may enjoy an enhanced self-image. Identity further depends on the extent to which j’s own given characteristics j match the ideal of j’s assigned category, indicated by the prescriptions P. Finally, identity depends on the extent to which j’s own and others’ actions correspond to prescribed behavior indicated by P. We call increases or decreases in utility that derive from Ij, gains or losses in identity.

What this comes down to, in my reading, is the idea that one's "identity" creates a new set of payoffs for some actions, depending on whether the action confirms and enhances one's identity fulfillment or whether it decreases one's identity fulfillment. If I am a Welsh miner and strongly subscribe to the idealizations associated with miners -- then I will take utility in the actions that express solidarity and thereby buttress my status as a good miner, even when the self-regarding utilities of the action would dictate anti-solidarity.  Crudely, identity-consonance is a plus utility, while identity-dissonance is a minus utility, and actors balance first-order utilities and identity-consonance utilities in their ultimate choice of action. So this construction doesn't deviate from standard rational choice reasoning much, if at all. Rather, it extends the cost-benefit calculation to include a new category of effect that the agent is hypothesized to value or disvalue--consistency / inconsistency with self concept.

This is a pretty limited conception of how identities work.  A more adequate treatment of identity as a substantive feature of social psychology ought to pay attention to a number of dimensions of practical rationality that are not included in this analysis.  (i) Cognitive frameworks.  Individuals with a specific identity may have distinctive ways of conceptualizing and experiencing the world.  These differences may affect behavior through mechanisms that are quite distinct from calculation of costs and benefits. (ii) Normative motivations. It is possible that people make decisions on the basis of their normative commitments, and that this process is to some degree independent from calculations of costs and benefits.  Moreover, it is possible that different groups have significantly different normative commitments. In this case individuals from different "identities" may behave significantly differently when confronted with apparently similar situations of choice. (iii) Group affinities / identifications.  It is possible that there is a social psychology of "solidarity" that has its own dynamic and behavioral consequences; and that this affective or motivational system has different characteristics in different groups. (iv) Emotional frameworks. It is possible that individuals absorb behaviorally important systems of emotions and feelings through their development within a specific cultural group; and it is possible that differences across groups lead to different patterns of behavior in common scenarios of action and choice.

So I think that Akerlof and Kranton are right to think that the theory of action associated with narrow economic rationality doesn't do justice to ordinary decision making in a range of important cases.  They are right as well in thinking that the social psychology of identities and normative commitments is relevant to behavior in ways that cannot be pushed aside as "extra-rational." But I don't find their solution based on incorporating identity "utilities" into a larger utility function to be an adequate way of incorporating these broader considerations for action into a theory of the rational actor.

(It is worth observing that the descriptions offered by Akerlof and Kranton of the prescriptions surrounding gender identity are quite jarring: for example, "the ideal woman is female, thin, and should always wear a dress". Here is another set of gender stereotypes that they weave into their exposition:

Female trial lawyer, male nurse, woman Marine—all conjure contradictions. Why? Because trial lawyers are viewed as masculine, nurses as feminine, and a Marine as the ultimate man. People in these occupations but of the opposite sex often have ambiguous feelings about their work. In terms of our utility function, an individual’s actions do not correspond to gender prescriptions of behavior. (721-22)

These assumptions aren't crucial to their argument, but they are difficult to overlook.  It is hard to read these expository paragraphs without thinking that Akerlof and Kranton have built some very basic negative stereotypes into their description of gender identities. So it's worth noting how a very good gender theorist might react to these descriptions.  Here is a very good, nuanced analysis by Elizabeth Cole and Alyssa Zucker on "Black and White Women's Perspectives on Femininity" that does a much more adequate job of describing gendered identities (link).)