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)
Understanding Society 