Identity economics suggests that we make economic decisions based on monetary incentives and our identity. A person’s sense of self or identity affects economic outcomes. This was outlined in Akerlof and Kranton’s (2000) seminal paper which expanded the standard utility function to include pecuniary payoffs and identity economics in a simple game-theoretic model of behavior, further integrating psychology and sociology into economic thinking.

When economic (or other extrinsic) incentives are ineffective in organizations, identity may be the answer: A worker’s self-image as jobholder and her ideal as to how her job should be done, can be a major incentive in itself (Akerlof & Kranton, 2005).