Identity and Economic Incentives

We develop a theoretical model and conduct field experiments to distinguish the impact of identity on shaping beliefs from its direct effect on preferences in individual investment choices. Our model suggests that identity distorts individuals’ perceptions of potential outcomes and leads to the discounting of outcomes from identity-incongruent sources. We validate our theoretical predictions through lab-in-field experiments, involving individuals with either affiliations or neutral stances towards investment opportunities. In these experiments, we elicit beliefs and investment choices with and without identity considerations while exogenously varying the material tradeoff between assets. Individuals exhibit systematic over-optimism about assets aligned with their identity, and invest 20% more in these assets than in neutral ones. After accounting for individuals’ beliefs and risk preferences, our structural estimates show that participants undervalue gains from identity-incongruent assets by 17% to 27%. Counterfactual simulations indicate that identity-distorted beliefs account for 30% to 44% of the observed investment gap, with the remainder attributable to identity-driven preferences.