Browsing by Author "Valtonen, Jani"

This masters thesis is a literature review on social identity economics. Traditional economic models, in which decisions of a rational agent are analyzed, have been challenged by models and theories where concepts and insights from other sciences such as sociology and psychology are introduced. Identity economics - pioneered by George Akerlof and Rachel Kranton - is a field that brings now the social context in to the economic analysis. In this thesis, I collect together the essential theories of identity and economics. I start by representing related work on experimental economics and the relevant developments of the field. I review both empirical and theoretical literature on how the concept of social identity explains decision-making. The main focus is on Akerlof and Kranton (2000), whose concept of identity is based on social categories to which people belong to. These categories have ideal characteristics and behavioral norms that the members of the category follow. Identity is incorporated into a standard utility function analysis as an endogenous explanatory variable. Real-life examples of social identity economics in use are drawn from military and civilian workplaces. As an example of a model of social identity, I present a theoretical model by Akerlof and Kranton (2005, 2008). Their model is a classical principal-agent model modified to fit into the setting of social identity economics. It explores employee behavior in organizations in a simple two-agent environment, where the agent chooses between high and low effort and the principal observes profits. Once the social identity of workers is introduced, the effort level of workers depends on their type, insider or outsider. I demonstrate that, consequently, the wage levels for different efforts are closer to each other. Last I present critique against identity economics approach. Although social identity economics does take into account an important factor that has previously been omitted, there are problems with the approach. Most importantly, it is not obvious that the social identity is incorporated to the models in a right way. For example, standard analysis concentrates on the concept of social identity, and the personal identities of decision-makers are omitted.