Moses Shayo

A Model of Social Identity with an Application to Political Economy: Nation, Class, and Redistribution

This article develops a model for analyzing social identity and applies it to the political economy of income redistribution, focusing on class and national identities. The model attempts to distill major findings in social psychology into a parsimonious statement of what it means to identify with a group and what factors determine the groups with whom people identify. It then proposes an equilibrium concept where both identities and behavior are endogenously determined. Applying this model to redistribution helps explain three empirical patterns in modern democracies. First, national identification is more common among the poor than among the rich. Second, national identification tends to reduce support for redistribution. Third, across democracies there is a strong negative relationship between the prevalence of national identification and the level of redistribution. The model further points to national eminence, national threats, and diversity within the lower class as factors that can reduce redistribution.

Social Identification and Ethnic Conflict

When do ethnic cleavages increase the risk of conflict? Under what conditions is a strong common identity likely to emerge, thereby reducing that risk? How are patterns of social identification shaped by conflict? We draw on empirical results regarding the nature and determinants of group identification to develop a simple model that addresses these questions. The model highlights the possibility of vicious and virtuous cycles where conflict and identification patterns reinforce each other. It also shows how processes of ethnic identification amplify the importance of political institutions and traces the effects of national status and perceived differences across ethnic groups. Finally, we demonstrate how a small but sufficiently potent group of ethnic radicals can derail a peaceful equilibrium, leading to the polarization of the entire population. We reexamine several historical cases as well as empirical correlates of civil wars in light of these results.

A Theory of Social Identity with an Application to Redistribution

This paper develops a framework for incorporating social identity into economic theory. We say that an individual identifies with a group if he cares about the status of that group and wants to resemble its members. Identification is endogenous. People are more likely to identify with a group the higher its status and the more similar they see themselves to other group members. In equilibrium, both identities and behavior are endogenously determined. The model generalizes existing models of social preferences and organizes a large set of results from experimental economics and social psychology (determinants of ingroup bias, cooperation and conformity). The usefulness of the model in explaining large-scale phenomena is examined by applying it to the political economy of income redistribution, focusing on class and national identities. We show that it can help explain three major patterns observed in modern democracies. First, national identification is more common among the poor than among the rich. Second, national identification reduces support for redistribution. Third, across democracies there is a strong negative relationship between the prevalence of national identification and the level of redistribution. The last two patterns have not been systematically documented before and are reported here for the first time. The application further points to national prominence, threats to the nation and diversity within the lower class as factors that may reduce redistribution. It suggests the possibility that rising inequality may lead to less demand for redistribution.

Parochialism as a Central Challenge in Counterinsurgency

Current U.S. practice in Afghanistan may reify social divisions, which undermines institutions critical to postwar stability. Americas power preponderance since the end of the Cold War has not translated into an ability to win quickly and decisively against insurgency. The U.S. military, designed to fight Soviet tanks on European battlefields, for the past decade has fought insurgents wearing flip-flops and using improvised explosives in Iraq and Afghanistan. Clear victories in counterinsurgency are rare, and these wars are costly (1) and long-lasting (table S1). Peace after civil wars, of which insurgencies are a subtype, is tenuous.

Long Term Savings Decisions: Financial Reform, Peer Effects and Ethnicity

In 2005, a drastic reform in the Israeli capital market shifted the power to choose savings vehicles from employers to individuals. Using a unique dataset from a large employer, this event provides us a rare window into individuals’ savings decisions and the effect of their social environment. In the first year following the reform’s implementation, 7% of the employees switched out of the fund in which they all previously saved. Choice of fund was not associated with observable measures of fund performance, but was strongly affected by the employees’ social environment. Exploiting within-department variation in peer groups, we find that savings decisions were strongly influenced by the choices of co-workers from the same ethnic group. Interviews also point to the influence of non-professional colleagues.

Learning by Trading

Understanding financial concepts and participating in financial markets is increasingly important. Yet adults often lack the immediate incentives and opportunity to learn. We develop a simplified trading platform that incentivizes individuals to trade stocks for 4-7 weeks, with no additional educational content. Sampling 1035 prime age adults, our field experiment shows that trading significantly improves financial knowledge and attenuates the gender gap in both financial literacy, self-assessed financial knowledge and subsequent stock investment. It does this both by raising womens confidence and by mitigating mens overconfidence. Beyond this, the treatment compresses the gender gap in risk tolerance and trust, while making individuals more self-reliant in their financial decisions.How can we help individuals handle financial decisions in an increasingly complex environment? We explore an easily scalable avenue for improving financial understanding: learning by online trading in stocks. We randomly assign 1345 adults incentives and opportunities to trade stocks for 4-7 weeks, with no additional educational content. The treatment significantly improves financial literacy and attenuates the gender gap in self-assessed financial knowledge. Treated individuals are more likely to subsequently invest in stocks and less likely to seek external advice. The effects strengthen for those exposed to index funds, foreign assets, and rising or more volatile asset prices.

Grexit vs. Brexit: International Integration under Endogenous Social Identities

International integration is not driven purely by economic considerations but may also be affected by identity politics. We propose a simple framework to study the effects of identity on integration, allowing identities themselves to be endogenous (a German citizen may identify as German but may also identify as European). We find that contrary to widespread intuitions, a robust union does not require that all members share a common identity. Furthermore, while national identication in the periphery leads to premature breakup, a common identity can sometimes lead to excessively large unions. Finally, a union is more fragile when periphery countries have high ex-ante status, whereas low-status countries are less likely to secede, even when between-country economic differences are large and union policies impose signicant hardship. Brexit is more likely than Grexit.This paper o ers a rst step towards introducing social identity into international economics. We develop a simple framework to study the interaction between identity politics and international integration, allowing identities themselves to be endogenous. Contrary to widespread intuitions, we nd that a robust union does not require that all members share a common identity. Nor is a common identity likely to emerge as a result of integration. Furthermore, while national identi cation in the periphery leads to premature breakup, a common identity can sometimes lead to excessively large unions. A union is more fragile when periphery countries have high ex-ante status. Low-status countries are less likely to secede, even when between-country economic di erences are large and although union policies impose signi cant hardship. We trace the implications of the model for likely entrants and defectors from the EU and the