The limits of social identity impact on economic preferences

This paper analyzes the impact of social identity on economic preferences. We argue that the influence of the social identity, that is, the sense of self derived from group membership, may dilute when the identity norm requires a significantly high reduction in the individual’s payoff. The social identity effect is more pronounced at lower payoffs. We further show that social identity impact, which include the effect of ethnic identities such as White, Asian, Black, and Immigrant, on economic preferences may amplify when it increases payoffs or reduces cost. We show that tendency to reward in-group behavior and punish out group behavior reduces significantly when the cost of rewarding or punishing increases. We argue that the empirical evidence on social identity impact presented in the literature should be interpreted with caution, as the contextual changes, such as the payoff size, may change the decision outcome.