In 1995, economist Rachel Kranton wrote future Nobel Prizeâwinner 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 peopleâfacing the same economic circumstancesâwould make different choices. This was the beginning of a fourteen-year collaborationâand of Identity Economics.
Identity economics is a new way to understand peopleâs decisionsâat work, at school, and at home. With it, we can better appreciate why incentives like stock options work or donât; why some schools succeed and others donât; why some cities and towns donât invest in their futuresâand much, much more.
Identity Economics bridges a critical gap in the social sciences. It brings identity and norms to economics. Peopleâs 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 peopleâs identityâtheir conception of who they are, and of who they choose to beâmay be the most important factor affecting their economic lives. And the limits placed by society on peopleâs identity can also be crucial determinants of their economic well-being.