Identity and Economic Incentives

Abstract:
This paper examines how beliefs and preferences drive identity-conforming consumption or investments. We introduce a theory that explains how identity distorts individuals’ beliefs about potential outcomes and imposes psychic costs on benefiting from identity-incongruent sources. We substantiate our theoretical foundation through two lab-in-field experiments on soccer betting in Kenya and the UK, where participants either had established affiliations with the teams involved or assumed a neutral stance. The results indicate that soccer fans have overoptimistic beliefs about match outcomes that align with their identity and bet significantly higher amounts on those than on outcomes of comparable games where they are neutral. After accounting for individuals’ beliefs and risk preferences, our structural estimates reveal that participants undervalue gains from identity-incongruent assets by 9% to 27%. Our counterfactual simulations imply that identity-specific beliefs account for 30% to 44% of the investment differences between neutral observers and supporters, with the remainder being due to identity preferences.

About the speaker:
Dr. Kwabena Donkor’s research uses Behavioral Economics insights to explore topics within Industrial Organizations, Labor Economics, and Quantitative Marketing. His approach integrates behavioral economics theories with field data and experimental methods to examine the influence of social norms and identity on, and their interactions with, economic incentives and policies across various market environments. In a recent study, Donkor employs a formal model alongside field data to analyze how recent advancements in payment technologies have reshaped tipping norms in the taxi industry by introducing default tipping options. Together with his colleagues, he has developed and tested a new model in field experiments on the impact of identity on beliefs and preferences, revealing strategies to mitigate or intensify identity-based biases in areas ranging from firm strategy to health policy. Furthermore, in collaboration with Jeffrey Perloff, Donkor’s research shows that the Affordable Care Act significantly positively impacted seasonal farmworkers’ health outcomes. The study highlights an increase in the utilization of preventive medical services and a reduction in hospital and emergency room visits, aligning with the objectives of the law’s advocates.