Abstract

Group identity has emerged as a key explanatory variable of social exclusion or economic inequality because people prefer to benefit others who are similar to them (in- group favoritism) over those belonging to a different social group. If group identification were fixed, individuals belonging to disadvantaged groups would be unable to escape them. However, research has shown that identities are constructed and can change as the product of human decision making. Two key processes that can limit group change are social regulation (pressure from the in-group to stay) and social integration (ability to be identified by the out-group after the change). In this paper I study the extent to which the choice over their group identity, mediated by social regulation and/or integration, can help individuals break free from inefficient processes. Particularly, I look at group identity choices in a social network setting where interactions with others (both in-group and out-groups) are strategically interdependent. I provide a theoretical model and characterize equilibrium outcomes when group identities can be changed. I also test the role of group identity in different settings through laboratory experiments.