Akerlof 2005 - Identity and the Economics of Organizations

Google Scholar Link

Akerlof, G. A., & Kranton, R. E. (2005). Identity and the Economics of Organizations. Journal of Economic perspectives, 19(1), 9-32.

While unusual for a management paper, over half of this paper is dedicated to providing real-world examples, especially from the field of sociology. This greatly enhanced my perception of its validity and helped me see how it might be applied.

Summary

A firm is more than just its physical capital and human capital. It also consists of motivational capital, or the ability of the firm to induce work through attachments like identity. When employees are highly identified with organizational goals, workers are more likely to put in high effort without a consummate increase in pay. This is because their utility related to the work is coming from identity processes. The military is used as an example (especially the upending experience experienced by new recruits whose former identity is replaced by a new identity). This model also helps explain why monetary incentives often don’t work as intended.

Social categories are used to define one’s identity. Norms are applied to social categories as well. As an individual begins to see themselves as part of a social category, they internalize the norms of that category (even if they initially only adopted the norms to avoid ridicule, another case of “fake it till you make it”, see Bargh 1999). This internalization is also called socialization. Identity can act as a situational frame. The categories of “insider” and “outsider” are particularly relevant. For example, micromanaging (“strict supervision”) tends to separate a manager as an outsider (or possibly the employees as outsiders from the company), which separates an employee from internalizing organizational goals. Greater pay is then needed to induce work.

Application

There is an economic benefit to organizational investment in identity building (e.g., McDonalds throws away warm fries in favor of hot fries). This sometimes takes the form of culture. Initiation rites, hazing, doing hard things (which causes cognitive dissonance), changes in personal appearance (buzz cuts or uniforms), and isolation can all serve as elements of an upending experience. The opposite is also true, lack of organizational identification also incurs an economic cost.