Identity and Incentives

Microeconomic theory has traditionally had an individual focus; everyone makes personal decisions to maximize their utility based on economic and psychological incentives. However, until now, most theory has failed to incorporate the effect of identity on an individual’s economic choices.. A new integration of economics and sociology, “identity economics,” that takes into account the influence of social contexts on humans’ choices, has major ramifications for many areas of both corporate and policy interest, including problems that have plagued the American education system. Understanding students’ incentives through both economic and social incentives give useful ideas for improving our schools.

This theory has been brought to the fore by the groundbreaking new book, Identity Economics, by economists George Akerlof and Rachel Kranton. The two begin their investigation of students’ incentives with the traditional economic model in which students weigh the monetary costs and benefits of education. Then, however, they look at the social categories common in a school. There are “insiders” are often the jocks or high achievers who are very involved in school life. There are also “outsiders,” the “burnouts” who resent the culture of the insiders and the school as a whole. They are not invested in their life at school and do not feel a meaningful relationship to the institution.

Finally, they examine the effect that these identities have on the utility functions of the students. The students who identify as insiders will benefit from being involved in the school and exerting at least a moderate level of academic effort. The outsiders, however, would be unhappy with these activities. Rather, their sense of self is positively reinforced by rebellion against the educational environment.

Common remedies for bad schools include more resources and teacher training programs, and both of those can be beneficial solutions. Yet identity economics shows us that a school’s culture can be just as important, if not more so, in contributing to the success of its students. Akerlof and Kranton explain how many schools that have bucked the trend and succeeded where others have not have done so because of a cohesive culture where teachers and students feel united for a common mission or purpose. There are few, if any, “outsiders,” because everyone buys into the school’s ideas and missions.

Notable examples of this are the Knowledge is Power Program charter schools in various low-income neighborhoods throughout the country. The KIPP schools give disadvantaged middle school students a unique education by creating an immersive educational environment. Teachers create an intense and fun educational experience from the early years, ensuring that students grow up with a value of academic success and the culture of the school. As detailed in the wonderful book Work Hard, Be Nice, the schools create an environment where scholarly achievement and good character is valued by peers and the community. Communication with parents is frequent, so that everyone, from administrators to teachers, students, and parents, feels like an “insider” in the culture of the school.

By changing the way that students perceive themselves, these schools are transforming communities. A study by Johns Hopkins in 2007 found that “Even when pre-existing differences between KIPP and comparison students are controlled in statistical analyses, KIPP students generally outperformed comparison school students on achievement measures.” KIPP schools and other similar institutions are largely successful because they invest in developing the identity of their students.

Identity economics shows us that social incentives and norms crucially influence economic choices and decision-making. Through incorporating this new idea into standard microeconomic theory, we can change the way we view various challenging policy issues. Ironically, this new path of economic study might show us that sometimes the solution to a pressing problem might not be one of money or programs but rather, one of culture.

Ravi N. Mulani, a Crimson editorial writer, is an applied mathematics concentrator in Pforzheimer House.