A Theory of Social Identity with an Application to Redistribution

This paper develops a framework for incorporating social identity into economic theory. We say that an individual identifies with a group if he cares about the status of that group and wants to resemble its members. Identification is endogenous. People are more likely to identify with a group the higher its status and the more similar they see themselves to other group members. In equilibrium, both identities and behavior are endogenously determined. The model generalizes existing models of social preferences and organizes a large set of results from experimental economics and social psychology (determinants of ingroup bias, cooperation and conformity). The usefulness of the model in explaining large-scale phenomena is examined by applying it to the political economy of income redistribution, focusing on class and national identities. We show that it can help explain three major patterns observed in modern democracies. First, national identification is more common among the poor than among the rich. Second, national identification reduces support for redistribution. Third, across democracies there is a strong negative relationship between the prevalence of national identification and the level of redistribution. The last two patterns have not been systematically documented before and are reported here for the first time. The application further points to national prominence, threats to the nation and diversity within the lower class as factors that may reduce redistribution. It suggests the possibility that rising inequality may lead to less demand for redistribution