Group Identity and Social Preferences

Author(s): Yan Chen and Sherry Xin Li

Source: The American Economic Review , Mar., 2009, Vol. 99, No. 1 (Mar., 2009), pp. 431-
457
Published by: American Economic Association

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American Economic Review 2009, 99 1, 431-457
http //www aeaweb org/articles php?doi=10 1257/aer 991 431

Group Identity and Social Preferences

By Yan Chen and Sherry Xin Li*

We present a laboratory experiment that measures the effects of induced group

identity on social preferences. We find that when participants are matched with
an ingroup member, they show a 47percent increase in charity concerns and a
93 percent decrease in envy. Likewise, participants are 19 percent more likely to
reward an ingroup match for good behavior, but 13 percent less likely to punish
an ingroup match for misbehavior. Furthermore, participants are significantly
more likely to choose social-welfare-maximizing actions when matched with an
ingroup member. All results are consistent with the hypothesis that participants
are more altruistic toward an ingroup match. (JEL C91, D03, Z13)

Social identity is commonly defined as a person's sense of self derived from perceived mem?
bership in social groups. When we belong to a group, we are likely to derive our sense of identity,
at least in part, from that group. While standard economic analysis focuses on individual-level
incentives in decision making, group identity has been shown to be a central concept in under?
standing phenomena in social psychology, sociology, anthropology, and political science. It is
used to explain such phenomena as ethnic and racial conflicts, discrimination, political cam?
paigns (Rose McDermott, forthcoming), and the formation of human capital (James Coleman
1961).
Social identity theory was developed by Henri Tajfel and John Turner (1979) to understand the
psychological basis for intergroup discrimination. According to this theory, social identity has
three major components: categorization, identification, and comparison. The first component,
categorization, is the process of putting people, including ourselves, into categories. Labelling
someone as a Muslim, a female, or a soldier is a way of defining these people. Similarly, our
self-image is associated with what categories we belong to. Social psychology experiments
show that people quickly and easily put themselves and others into basic categories. The second
component, identification, is the process by which we associate ourselves with certain groups.
Ingroups are groups we identify with, and outgroups are ones we do not identify with. The third
component, comparison, is the process by which we compare our groups with other groups, cre?
ating a favorable bias toward the group to which we belong.

*Chen School of Information, University of Michigan, 1075 Beal Avenue, Ann Arbor, MI 48109-2112 (e-mail
yanchen@umich edu), Li School of Economic, Political, and Policy Sciences, University of Texas at Dallas, 800 West
Campbell Road, Richardson, Texas 75080 (e-mail sherry xin h@utdallas edu) We thank Gary Charness for helpful
discussions and for sharing his data and programs We are grateful to George Akerlof, Daniel Benjamin, Charles
Brown, David Cooper, Jennifer Crocker, Rachel Croson, Catherine Eckel, Steven Gjerstad, Ernan Haruvy, Rowell
Huesman, James Jackson, Sara Kiesler, Rachel Kranton, Kevin McCabe, Margaret Shih, Dan Silverman, Joel Slemrod,
two anonymous referees, and seminar participants at Community Lab (http //www communitylab org), the University
of Hawaii, NYU, UT-Dallas, Williams College, and ESA 2005 (Tucson, AZ) for helpful discussions and comments We
thank Alexandra Achen, Tracy Xiao Liu, and Benjamin Taylor for excellent research assistance, and Kan Takeuchi for
programming the experiment Any remaining errors are our own Chen gratefully acknowledges the financial support
from the National Science Foundation through grant IIS 0325837
431
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432 THE AMERICAN ECONOMIC REVIEW MARCH 2009

One insight from social identity theory is that the groups to which people belong mean some?
thing to them. Once a person sees herself as part of a group, she derives self-esteem from that
group membership and adopts behaviors that are consistent with the stereotypes associated with
the group identity. For example, Margaret Shih, Todd L. Pittinsky, and Nalini Ambady (1999)
study social identity and stereotype susceptibility with a group of Asian-American female under?
graduates given a math test under three conditions. A third of the students completed a question?
naire focused on their female identity before taking the test. Another third completed a pretest
questionnaire that focused on their Asian identity. The control group filled out a gender- and
ethnicity-neutral questionnaire. Results show that, relative to controls, participants earned the
highest test scores when the questionnaire emphasized their Asian identity and the lowest when it
emphasized their female identity. Shih, Pittinsky, and Ambady (1999) conclude that the question?
naire, which made one of their multidimensional social identities salient, changed the women's
performance according to powerful stereotypes associated with each identity, i.e., Asians possess
excellent quantitative skills and women do not. More recently, Daniel J. Benjamin, James J. Choi,
and A. Joshua Strickland (2007) find that making ethnic, racial, or gender identity salient also
causes risk and time preferences to conform to common stereotypes.
As group identity affects individual behavior, many experiments in social psychology assess
whether and to what extent people interact with ingroup and outgroup members differently. Most
of these experiments confirm Tajfel's finding that group membership creates ingroup enhance?
ment in ways that favor the ingroup at the expense of the outgroup.1 Many of these experiments
use the minimal group paradigm. In a typical minimal group experiment, subjects are randomly
assigned to groups, which are intended to be as meaningless as possible. The subjects then assign
points to anonymous members of both their own group and the other group. In these studies, sub?
jects tend to award more points to people who are identified as ingroup members. Experiments
involving ratings of ingroup and outgroup members have found that participants tend to rate
ingroup members higher than outgroup members.
The systematic introduction of identity into economic analysis starts with George A. Akerlof
and Rachel E. Kranton (2000). In their study, they propose a neoclassical utility function, where
identity is associated with different social categories and expected respective behaviors, i.e.,
a prescription or norm for behavior. Deviations from the prescription cause disutility. They
apply this model to analyses of gender discrimination, the economics of poverty and social
exclusion, the household division of labor (Akerlof and Kranton 2000), the economics of edu?
cation (Akerlof and Kranton 2002), and contract theory (Akerlof and Kranton 2005). More
recently, Roland B?nabou and Jean Tir?le (2006) present a complementary theoretical frame?
work, which emphasizes the management of beliefs and the cognitive mechanisms leading to
identity investments.
To endogenize the social norm in the Akerlof and Kranton (2000) model, and to under?
stand the role of social identity in determining behaviors such as reciprocity, distribution, and
social-welfare-maximizing (SWM) actions, it is crucial to systematically measure the effect of
identity on social preferences.
In this paper, we use laboratory experiments to measure the effects of group identity on par?
ticipant social preferences. Like classical social psychology experiments (Tajfel et al. 1971), we
induce group identity using participant artwork preferences. Furthermore, we compare different
group assignment methods and their effects on behavior. Unlike social psychology experiments,
however, which focus on allocation between other participants, we use a much wider class of
games to systematically measure the effects of identity on various aspects of social preferences,

1 We review this literature in more detail in Section I

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VOL. 99 NO. 1 CHEN AND Li: GROUP IDENTITY AND SOCIAL PREFERENCES 433

such as distribution and reciprocity preferences. As group behavior is predominantly investigated

in other-other allocation tasks in the social psychology literature, little is known about whether
and when it is sustained when there is a conflict with self-interest. We choose a sample of simple
games from Gary Charness and Matthew Rabin (2002), incorporate social identity into the social
preference model, and estimate its effects on social preferences.
Specifically, we are interested in several questions. First, are participants more difference averse
toward ingroup members than outgroup members? If so, to what extent? Second, are participants
more likely to reciprocate positively toward ingroup members? Are they more likely to forgive or to
punish perceived bad intentions of ingroup members? Third, are they more likely to choose SWM
actionswhenmatchedwithaningroupmembercomparedtowhenmatchedwithanoutgroupmember?
Finally, by varying the experimental design, we can address the question of what creates group
effects.
The rest of the paper is organized as follows. Section I reviews the social psychology and
experimental economics literature on social identity. Section II presents the experimental design.
Section III presents the analysis and results. Section IV concludes.

I. Literature Review

In this section, we review the social identity literature in social psychology and experimental
economics, respectively.

A. Social Identity Research in Social Psychology

The social psychology literature on social identity is enormous. In summarizing its main
methodologies and findings, we rely primarily on several major survey articles, Tajfel and Turner
(1986), Kay Deaux (1996), Michael A. Hogg (2002), McDermott (forthcoming), and a number of
recent studies not yet incorporated into a major survey.
Two major experimental methods in social identity research have been used extensively in
social psychology: priming natural social identities, and inducing (artificial) group identities. We
will briefly summarize the former, and focus our discussion on the latter, as it is more closely
related to our research.
Priming is an experimental technique often used in social identity research. Research in social
psychology has found that subtly making different natural social identities salient through prim?
ing can affect behavior and outcomes, such as test performance (Joshua Aronson, Dianne Quinn,
and Steven Spencer 1998), walking speed (John Bargh, Mark Chen, and Lara Burrows 1996) or
person perception (Bargh and Paula Pietromonaco 1982).
A second experimental method in social identity research relies on induced group identities
in the laboratory. In particular, the experimental method designed to test social identity theory
(Tajfel and Turner 1979) is called the minimal group paradigm, whereby groups are created
using trivial and sometimes almost meaningless tasks. The criteria for a group to be minimal
(Tajfel and Turner 1986) include:

1. Group assignment rule: subjects are randomly assigned to nonoverlapping groups on the
basis of some trivial tasks.

2. No social interaction takes place between the subjects, where social interactions include
both face-to-face and technology-mediated interactions, such as online chat.

3. Group membership is anonymous.

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434 THE AMERICAN ECONOMIC REVIEW MARCH 2009

4. The decision task requires no link between a chooser's self interest and her choices. Two
tasks are common in measuring ingroup bias. In the first task, each subject awards amounts
of money to pairs of other subjects who are anonymous except for their group membership.
Another frequently used task is evaluative ratings of other subjects (Brian Mullen, Rupert
Brown, and Colleen Smith 1992).

Of the four criteria for groups to be minimal, the fourth one is the least likely to be satisfied
in economics environments, where many decisions involve trade-offs between self-interest and
group interest.
Summarizing 15 years of social identity research using the minimal group paradigm, Tajfel
and Turner (1986) conclude that "the trivial, ad hoc intergroup categorization leads to ingroup
favoritism and discrimination against the outgroup."2 Several factors have been found to enhance
or mitigate ingroup bias, for example, category salience, group status, and relevance of the com?
parison dimensions (Mullen, Brown, and Smith 1992). Furthermore, summarizing 40 years of
social psychological research on intergroup relations, Marilynn B. Brewer (1999) concludes that
ingroup formation and attachment is psychologically primary while attitudes toward outgroups
is not.
More recently, however, a number of studies have not found ingroup favoritism with minimal
groups. A common feature of these studies is that they violate the fourth criterion for groups to
be minimal. For example, Toshio Yamagishi and Toko Kiyonari (2000) find that, in a modified
prisoner's dilemma game with a large number of strategies, while players cooperate more with
an ingroup member than with an outgroup member in the simultaneous move game, the group
effect disappears in the sequential game (where all players were first movers).3 They argue that
expectations from generalized reciprocity from ingroup members (in the simultaneous move
game) is the source of ingroup favoritism in a minimal group. By contrast, in a sequential game
when direct reciprocity is possible, group effects are eliminated.
To our best knowledge, there is no definitive answer to the question of what generates group
effects in the social psychology literature. Two competing hypotheses are pure categorization alone
(Tajfel and Turner 1986) and expectations of generalized reciprocity among ingroup members
(Yamagishi and Kiyonari 2000). Some other fundamental questions remain open. For example,
does social identity change behavior by influencing agent's expectations about fellow ingroup
members' behavior or by changing the agent's preferences? If the latter, what functional forms
or basic axioms best explain the data? Candidate behavioral principles include maximizing the
average payoffs of ingroup members (Brewer and Michael D. Silver 2000), maximizing inter?
group differences (Tajfel and Turner 1986), and the metacontrast principle (Turner 1985), i.e.,
maximizing intergroup differences and minimizing intragroup differences. By using one game
in any given study, as has been typical in social psychology studies of social identity, it is unlikely
for the researchers to obtain a robust estimate of functional forms across a wide variety of situa?
tions and games. By contrast, our study uses 24 games incorporating a wide variety of incentives,
which enables us to get a robust estimate of the functional forms and parameters.

B. Social Identity Research in Experimental Economics

There have been a number of economic experiments on group identity, using either primed
natural identities or induced identities.

2 Tajfel et al (1971) is considered the first experiment using the minimal group paradigm
3 There were no second movers in the sequential treatment, although the participants were led to believe that they
existed Every first mover was paid as if the second mover had given the same amount as the first mover

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 VOL. 99 NO. 1 CHEN AND LI: GROUP IDENTITY AND SOCIAL PREFERENCES 435

In economic experiments that prime natural identities, gender and ethnicity in particular, the
results are mixed. On the one hand, Jamie Brown-Kruse and David Hummels (1993) and C.
Bram Cadsby and Elizabeth Maynes (1998) use a pr?game questionnaire to prime gender identity
and find that gender does not have a significant effect on participant contributions in a voluntary
contribution public goods experiment. On the other hand, John L. Solow and Nicole Kirkwood
(2002) and Rachel T. A. Croson, Melanie B. Marks, and Jessica Snyder (2003) find that the effect
of gender on levels of contribution is significant. Interestingly, Croson, Marks, and Snyder (2003)
find that, in a threshold public goods game with multiple equilibria, coordination and group effi?
ciency increase among women who interact with members of a naturally occurring group, while
the effects are opposite for men.
Three recent studies using natural groups find significant effects of group identity on behavior.
Helen Bernhard, Ernst Fehr, and Urs Fischbacher (2006) use a dictator game experiment with
third-party punishment in two distinct, native social groups in Papua New Guinea. They find
that third parties show stronger altruism toward ingroup victims and give ingroup norm viola?
tors more lenient judgments. Relevant to our study, dictators in their study are seen as uphold?
ing social norms when they transfer money to ingroup members. Therefore, ingroup favoritism
is a strong force in altruistic norm enforcement and sharing decisions. Lorenz Goette, David
Huffman, and Stephan Meier (2006) examine the effects of group membership in a prisoner's
dilemma game using natural groups (platoons) in the Swiss Army. They find more cooperation
when subjects interact with ingroup members. In a second experiment similar to Bernhard, Fehr,
and Fischbacher (2006), they also find that third-party punishment is stronger when a violation
affects an ingroup member as opposed to an outgroup member. Lastly, Tomomi Tanaka, Colin F.
Camerer, and Quang Nguyen (2008) find that group behavior in Vietnamese village communities
is affected by the status of the ethnic groups. While Khmer (poor minority) show strong ingroup
favoritism, Vietnamese (majority) and Chinese (rich minority) do not show ingroup bias when
they are matched with Khmer, but do so when they are matched with each other.
In comparison with natural group identities, using induced identities might give the experi?
menter more control over the identity formation process. The extent to which induced identity
affects behavior depends on the strength of the social identity. Catherine C. Eckel and Philip J.
Grossman (2005) use induced team identity to study the effects of varying identity strength on
cooperative behavior in a repeated-play public goods game in the laboratory. They find that "just
being identified with a team is, alone, insufficient to overcome self-interest." However, actions
designed to enhance team identity, such as group problem solving, contribute to higher levels
of team cooperation. Their finding suggests that high degrees of team identification may limit
individual shirking and free-riding in environments with a public good. Charness, Luca Rigotti,
and Aldo Rustichini (2007) report a series of experiments on the effects of group membership
on individual behavior in prisoner's dilemma and battle-of-the-sexes games. In the Tajfel-style
minimal group treatment satisfying criteria 1-3, they find no statistical difference in the rate of
cooperation with ingroup and outgroup members. In other treatments where groups are more
salient, the authors find that group membership significantly affects individual behavior. Kendra
N. McLeish and Robert J. Oxoby (2007) study the effects of group identity in simple bargaining
games using induced identity. They find that negative outgroup opinion can reinforce ingroup
identity, making ingroup members more cooperative with each other.
While previous experiments have demonstrated when and to what extent social identity affects
individual behavior in various types of games, none of them systematically estimates its effects
on social preferences. This study contributes to the literature by investigating the role of group
identity on social preferences in a wide variety of games and by evaluating the effects of various
components in creating group identity.

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436 THE AMERICAN ECONOMIC REVIEW MARCH 2009

II. Experimental Design

Our experimental design addresses the following objectives: to determine the effects of group
identity on various aspects of participant social preferences and to evaluate the effect of group
identity on social welfare. Furthermore, we evaluate different ways of creating group identity in
the laboratory, to explore the formation of groups and to investigate the foundation of what group
identity is.
The experiments have five treatments and one control. In the treatment sessions, there are four
stages. The first stage is a group assignment stage. The second stage is a collective problem solv?
ing stage using an online chat program. The third stage is an other-other allocation stage, where
each participant allocates tokens to two other participants. The fourth stage is a set of two-person
sequential games. While subjects in different treatments participated in different stages, subjects
in the control sessions participated only in the fourth stage.

A. Stage 1: Group Assignment

All five experimental treatments contain the group assignment stage, where we explore two
different group assignment methods. In our Original treatment, subjects reviewed five pairs of
paintings by two modern artists, Klee and Kandinsky, with one painting within each pair by
Klee, and the other by Kandinsky.4 Without being told the artist of each painting, participants
reported independently which painting in each pair they preferred. Based on their reported paint?
ing preferences, subjects were divided into two groups, the Klee group and the Kandinsky group.
Subjects were privately informed about their group membership and the number of people in
their group. Groups remained the same throughout the experiment.
To experimentally evaluate the difference between our group assignment based on true paint?
ing preferences and random assignment, we used two treatments with random assignment, i.e.,
RandomWithin and RandomBetween. In both treatments, at the beginning of the experiment,
each participant randomly drew one from a stack of envelopes, each of which contained either
a Maize or a Blue slip, which determined whether they were assigned to the Maize group or
the Blue group. The only difference between the two random treatments is in stage 4. In the
RandomWithin treatment, participants made decisions for both ingroup and outgroup matches. In
the RandomBetween treatment, however, in two of the four sessions, participants were matched
with only ingroup members and made one (ingroup) decision in each game. Similarly, in the
remaining two sessions, they were matched only with outgroup members and made one (out?
group) decision in each game. A comparison of the RandomWithin and the Original treatments
enables us to explore any difference between random assignment versus group assignment based
on true painting preferences, while a comparison of the RandomWithin and RandomBetween
treatments enables us to evaluate any experimenter demand effects in the original within-subject
design. The latter also enables us to evaluate the importance of the presence of an outgroup in
creating the group effects.
At the end of the first stage, after being categorized into two groups, subjects in the Original
treatment were given the answer key to the artists.5 In the RandomWithin and RandomBetween

4 Wassily Kandinsky (1866-1944) was one of the first creators of pure abstraction in modern painting His friend,
Paul Klee (1879-1940), was also among the significant modern artists of the twentieth century Their paintings were
used by classic studies of social identity in social psychology (Tajfel et al 1971)
5 The five pairs of paintings are IA Gebirgsbildung, 1924, by Klee, IB Subdued Glow, 1928, by Kandinsky, 2A
Dreamy Improvisation, 1913, by Kandinsky, 2B Warning of the Ships, 1917, by Klee, 3A Dry-Cool Garden, 1921,
by Klee, 3B Landscape with Red Splashes I, 1913, by Kandinsky, 4A Gentle Ascent, 1934, by Kandinsky, 4B A
Hoffmannesque Tale, 1921, by Klee, 5A Development in Brown, 1933, by Kandinsky, 5B The Vase, 1938, by Klee

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VOL. 99 NO. 1 CHEN AND LI: GROUP IDENTITY AND SOCIAL PREFERENCES 437

treatments, participants were given the five pairs of paintings along with the answer keys. They
had five minutes to study these paintings to prepare them for the second stage.

B. Stage 2: Online Chat

After being assigned into groups, subjects in the Original, RandomWithin, and RandomBetween
treatments subsequently participated in a second task that involved group communication via a
chat program on computers. The task was to answer two questions on which artist made each of
two additional paintings.6 Given ten minutes, subjects voluntarily exchanged information with
own-group members via a chat program to help one another obtain correct answers. Separate
chat channels were used so information could be shared only within a group. The subjects were
allowed to discuss any information during chatting, but conversations focused mainly on the
paintings. Experimenters monitored the chat process from the server and log files were saved
subsequently. Everyone was free to submit answers individually after the chat. One hundred
tokens were rewarded to each participant for each correct answer.7 This part of the design is used
to enhance group identity.
Since the online chat might have created a feeling of generalized reciprocity toward ingroup
members, to disentangle the effects of reciprocity and categorization, we added a NoChat treat?
ment, where the online chat stage was taken out while every other aspect of the design remained
the same as the Original treatment. A comparison of the NoChat and Original treatments enables
us to identify the effects of the online chat component on behavior.

C. Stage 3: Other-Other Allocation

In the third stage of the Original, RandomWithin, RandomBetween, and NoChat treatments,
every subject was asked to allocate a given number of tokens between two other anonymous
participants. No one was allowed to allocate tokens to herself. This feature of the experimen?
tal design is used widely in the minimal group paradigm in social psychology. Psychologists
consistently find ingroup favoritism and outgroup discrimination in other-other allocations, i.e.,
individuals allocate significantly more rewards to those from their own group and less to those
from a different group. We adopt this design feature for two purposes: to replicate the findings
in the social psychology literature and to enhance group identity further. Turner (1978) finds that
this other-other allocation procedure, if followed by self-other allocation, can help enhance the
sense of group identity.8
In our study, the stage of other-other allocations had five rounds. From round 1 to round 5,
the total number of tokens to be allocated increased from 200 to 400 with an increment of 50
tokens in each round. We used the strategy method to elicit participant strategy profiles.9 During
each round, everyone decided how to allocate tokens between another two people under three
scenarios: if both of them came from her own group, if both came from the other group, and if
one came from her own group and the other from a different group. It was public information

6 Painting 6 is Monument in Fertile Country, 1929, by Klee, and painting 7 is Start, 1928, by Kandinsky
7 Seventy-seven percent of the participants provided correct answers to both paintings, 19 percent provided one cor?
rect answer, and only 4 percent provided zero correct answers
8 In Turner (1978), participants were asked to allocate tokens in two conditions In one condition, everyone was
asked to allocate awards to two other individuals (other-other) before dividing awards between herself and the other
person with whom she was matched (self-other) In the other condition, the order was reversed Turner finds an order
effect on whether one was willing to trade self-interest for other's welfare Specifically, ingroup favoritism was signifi?
cant in the self-other choices if they were preceded by other-other allocations However, it was not significant when the
order was reversed
9 See Charness and Rabin (2005) for a discussion of the use of strategy methods in experimental games

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438 THE AMERICAN ECONOMIC REVIEW MARCH 2009

that only one round of their decisions would be randomly selected by the computer to compute
payoffs. At the end of the second stage, a random sequence of ID numbers was generated by the
computer to decide who allocated tokens to whom. Everyone allocated tokens between the two
participants whose IDs directly followed hers in the sequence. Therefore, one's payoff in this
stage was the sum of the tokens allocated to her by the two people whose IDs preceded hers in
the random sequence.
Again, to understand the effects of other-other allocation on the strength of group identity,
we added a NoHelp treatment, where both the online chat and the other-other allocation stages
were taken out. Therefore, a comparison of the NoHelp and the NoChat treatments enables us to
identify the effects of other-other allocation.

D. Stage 4: Two-Person Sequential Games

While the first three stages are designed to induce and enhance group identity, we use the fourth
stage to investigate the impact of group identity on social preferences and economic outcomes.
In this stage, subjects made decisions in a series of two-person sequential move games selected
from Charness and Rabin (2002), as well as an extension of some of the games.10 The Appendix
presents a description of the set of games and the summary statistics for each game. Specifically,
we selected 5 two-person dictator games and 16 two-person response games. Furthermore, to
investigate the sensitivity of player B's response to the cost in self-benefit, we added three games
that were based on the game Berk31 (Charness and Rabin 2002) with a varied amount for player
B payoff. Altogether, we have a total of 24 games.
The two-person response games fall into three categories. For games in the first category, B
incurs no cost to help or punish A. For games in the second category, B needs to sacrifice her own
self-interest to help A. For games in the third category, B incurs a cost if she penalizes A.
In the control and the Original treatment, subjects made decisions in seven to ten games in
each session.11 In all other treatments, subjects made decisions in 12 games in each session.12
For each game, each participant was randomly matched with another participant and they were
randomly assigned roles A or B. No feedback was given until the end of the experiment. This
procedure is similar to that in Charness and Rabin (2002). For the RandomBetween treatment,
each participant decides which strategy to use in each game, while in the remaining four treat?
ments, we use the strategy method to solicit participant decisions under two scenarios: if the
participant's match is from the same group, and if her match is from the other group. At the end
of the experiment, two of the games were randomly selected by the computer to compute the
payoffs, as announced in the instructions.

E. Summary

In sum, we conducted one control and five treatments. We have a total of 36 independent
sessions. At the end of each experimental session, we conducted a postexperiment survey,
which contains questions about demographics, past giving behavior, strategies used during the
experiment, group affiliation, and prior knowledge about the artists and paintings. The survey

10 We thank Gary Charness for helping us select the games and sharing data and programs
11 Game Set 1 includes Diet 1, Diet 3, Resp la, Resp 2b, Resp 5a, Resp 5b, Resp 10, Game Set 2 includes Diet 2, Diet
4, Diet 5, Resp 2a, Resp 3, Resp 4, and Resp 11, Game Set 3 includes Resp lb, 6-9, 12, and 13a-d
12 Game Set 1 includes Diet 1, Diet 3, Resp la, Resp 2b, Resp 5a, Resp 5b, Resp 6, Resp 10, and Resp 13a-d, while
Game Set 2 includes Diet 2, Diet 4, Diet 5, Resp lb, Resp 2a, Resp 3, Resp 4, Resp 7-9, and Resp 11-12

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 VOL 99 NO 1 CHEN AND Li GROUP IDENTITY AND SOCIAL PREFERENCES 439

Table 1?Features of Experimental Sessions

Treatments Group assignment Chat Other-Other Within/Between No. No subjects

sessions (A)
Control N/A No No N/A 9 134(133)
Original Painting Yes Yes Within 15 240(237)
NoChat Painting No Yes Within 4 64(64)
NoHelp Painting No No Within 2 32(32)
RandomWithin Random Yes Yes Within 2 32(32)
RandomBetween Random Yes Yes Between 4 64 (64)
Total 36 566 (562)
Note The last column (in parentheses)

and response statistics, experim

material.
Table 1 summarizes the features of experimental sessions, including treatments, group assign?
ment methods, whether a treatment includes the online chat stage, whether it includes the other
other allocation stage, whether it uses a within- or a between-subject design, the number of
sessions in each treatment, the total number of subjects in each treatment, and the number of
subjects used in the analysis (the last column in brackets). Overall, 36 independent comput?
erized sessions were conducted in the Research Center for Group Dynamics (RCGD) lab at
the University of Michigan from January to July 2005, and in May and June 2007, yielding a
total of 566 subjects, of which 562 were used in the analysis.13 We used z-Tree (Fischbacher
2007) to program our experiments. Most of our subjects were students from the University of
Michigan.14 Participants were allowed to participate in only one session. Each treatment session
lasted approximately one hour, whereas each control session lasted about 30 to 35 minutes.15 The
exchange rate was set to 100 tokens for $1. In addition, each participant was paid a $5 show-up
fee. Average earnings per participant were $18.85 for those in the treatment sessions and $14.40
for those in the control sessions.

III. Results

In this section, we first investigate how group identity affects participant social preferences.
We then address the question of what creates the group effects.
Several common features apply throughout our analysis and presentation. First, our general
null hypothesis is that behavior does not differ between the treatments. Second, we use a 5
percent statistical significance level as our threshold (unless stated otherwise) to establish the
significance of an effect.

A. Effects of Group Identity on Social Preferences

In this section, we first examine the effects of group identity on other-other allocations. We
then investigate how group identity affects participant social preferences, including distribution
preferences, reciprocity, and SWM behavior. All results in this section use data from the Original
treatment and the control. Results from the other four treatments are presented in Section B.

13 Despite our announcement that each subject can participate in only one session and our pre-expenment screening,
four subjects participated twice In all analyses, we exclude the second-session data for these subjects
14 A few subjects were staff members at the University of Michigan
15 Recall that participants in control sessions participated only in the fourth stage of the experiment

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440 THE AMERICAN ECONOMIC REVIEW MARCH 2009

We first investigate whether participants show ingroup favoritism when allocating tokens
between two other individuals. Recall that, during each of the five rounds of other-other allo?
cations, a participant made decisions under three scenarios: if the two other individuals came
from her own group; if they came from the other group; and if one came from her own group
and one from the other group. Social psychology experiments demonstrate that participants allo?
cate tokens equally between two other persons in the first two scenarios, while in the last sce?
nario, they persistently give more tokens to the ingroup match. The main difference between the
other-other allocation stage of our experiment and the social psychology experiments is that, in
our experiment, allocations translate into real monetary payoffs at a pre-announced exchange
rate.
Figure 1 presents the average allocation by round under each of the three scenarios. In all
graphs, the horizontal axis is the number of rounds, while the vertical axis is the number of
tokens allocated. The top-left panel presents the average allocation between two ingroup mem?
bers. The top-right panel exhibits the average allocation between two outgroup members. The
bottom panel presents the average allocation between an ingroup and an outgroup member. The
top panels show that, on average, participants allocate an almost equal amount to two other
individuals, if they are both from an ingroup or an outgroup. In the bottom panel, however, the
average number of tokens allocated to an ingroup member (a diamond) is significantly more than
that allocated to an outgroup member (a square). The difference between ingroup and outgroup
allocations (normalized by endowment) is between 32.2 percent and 38.4 percent, statistically
significant at the 1 percent level for each of the five rounds (r-statistics for one-tailed tests for
paired samples). Therefore, with real incentives and groups based on true painting preferences,
we replicate the ingroup favoritism result of minimal group paradigm experiments.
Next, we analyze the effect of group identity on distribution preference, i.e., charity and envy,
without reciprocity. We first extend Charness and Rabin's social preference model to incorporate
group identity.16 In the two-person model of social preference developed by Charness and Rabin
(2002), an individual's utility function is a weighted average of her own and her match's monetary
payoffs.17 To illustrate, let irA and ttb he players A's and B's monetary payoffs, respectively. Let wA
denote the weight that player B puts on A's payoff. Player B's preference is represented by

?B^A^b) = WA^A + (1 - wjTTj

= (pr+CT5)7TA+ [1 - (pr+6T5)]7T?,

where r = 1 if nB > irA, and r = 0 otherwise. Similarly, s = 1 if itb < 7rA, and 5 = 0 otherwise.
Therefore, the weight B places on A's payoff, wA = pr + as, may depend on the comparison
between A's and B's payoffs. The parameter p measures B's charity concern when her payoff is
higher than her match's, while cr measures B's envy when her payoff is lower than her match's.
We incorporate group identity into the model by redefining the weight that player B puts on A's
payoff as

w'A = p(l +Ia)r+cr(l +Ib)s9

16 In addition to Charness and Rabin (2002), key social preference models include Rabin (1993), David K Levine
(1998), Fehr and Klaus M Schmidt (1999), Gary E Bolton and Axel Ockenfels (2000), Amin Falk and Fischbacher
(2006), and James C Cox, Daniel Friedman, and Steven Gjerstad (2007)
17 A CES model of social preference incorporating both distribution and reciprocal preferences, which extends the
model of Cox, Friedman, and Gjerstad (2007), is estimated and discussed in Yan Chen and Sherry Xin Li (2008)

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 VOL 99NO I CHEN AND LI GROUP IDENTITY AND SOCIAL PREFERENCES 441

Figure 1 Other-Other Allocations in the Original Treatment

where / = 1 if players B and A belong to the same group, and 7=0 otherwise The parameters, a
and b, capture the additional ingroup effect for charity and envy, respectively For example, when
B receives a higher payoff than A, the parameter p measures the chanty effect for an outgroup
match, while p( 1 + a) measures the charity effect for an ingroup match The difference, a,
measures the additional effect of ingroup identity on an individual's charity concerns Therefore,
the new utility function for player B is

(1) UB(7TA91TB) = W*A 7TA + ( 1 - Htf) 7TB

We use player B's data from the sequential games to estimate the parameters of equation (1)
Our maximum-likelihood estimation on our binary-response data uses a logit specification
-yu(actionl)
Pt (action!) = ?, , n-, t ow
where the parameter 7 reflects the sensitivity of the choices to utility differences When 7 = 0,
this model is reduced to a random choice model with equal probability When 7 is arbitrarily

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 442 THE AMERICAN ECONOMIC REVIEW MARCH 2009

Table 2?Distribution Preferences Maximum Likelihood Estimates for Player B Behavior

Panel A Charity Envy

Control 0427 -0 049
(V-536) (0 022)*** (0 025)*
Panel B Outgroup charity Outgroup envy Ingroup charity Ingroup
P0 v0 P ( 1 + a ) cri ( 1 + ? ) a D
Treatment 0 323 -0112 0 474 -0 008 0 467 -0 931
(V-1,896) (0 021)*** (0 019)*** (0 018)**** (0 021) (01
***

Notes Panel A reports estimates for the control sessions without identity, while panel B rep
sessions with identity
*** Significant at the 1 percent level
** Significant at the 5 percent level
* Significant at the 10 percent level

large, the probability of choosing the action with higher utility approach
higher is the value of 7, the sharper the model predictions (Daniel McFa
Table 2 reports the results of our parameter estimation. As a benchmark
ity and envy parameters for the control sessions. For the treatment session
eter estimates for both ingroup and outgroup matches as well as their dif
by parameters a and A. We now summarize our main results based on the

RESULT 1 (Distribution Preferences): Participants exhibit charity (en

receives a lower (higher) payoff than they do. Their charity (envy) tow
significantly greater (less) than that toward an outgroup match.

Support. In Table 2, the charity parameter p is 0.427 for the control s

Original treatment, po = 0.323 for outgroup matches, and pt = p0(\ +
matches. All estimates are statistically significant at the 1 percent le
parameter a is -0.049 for the control sessions and a0 = -0.112 for outgro
it is cr, = a0 (1 + A) = -0.008 for ingroup matches. The parameter estim
tistically significant at the 5 percent level for the control and 1 percent
matching. We cannot reject that it is zero for the ingroup matching. The
on charity is measured by the parameter a = 0.467 (p < 0.01), while the e
on envy is measured by the parameter A = -0.931 (p < 0.01).
Result 1 indicates that, when participants have a higher payoff, they sho
in charity concerns toward an ingroup match compared with an outgroup
pants have a lower payoff than their ingroup match, they show a 93 pe
This is the first main result of the paper, which rejects the null hypothesi
no influence on participant distribution preferences. Rewriting equation
charity parameters yields

(2) uB ( tta, nB ) = 0.414tta + 0.5267r?, when nB > nA,

when A is an ingroup match. In comparison, B's utility function become

(3) uB (-k?a, ttb) = 0.32371-* + 0.611ttb, when nB > ix?A,

when A is an outgroup match, and

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VOL. 99 NO. 1 CHEN AND LI: GROUP IDENTITY AND SOCIAL PREFERENCES 443

(4) uB ( 7rjJ, itb ) = 0.4277T? + 0.573ttb, when ttb > ttJ,

when A is a match in the control sessions.

Similarly, it is informative to rewrite equation (1) using the estimated envy parameters. For an
ingroup match, this yields

(5) uB ( 7rlA, irB ) = -0.0087T? + 1.0087Tfl, when vrB < tta,

which is statistically equivalent to maximizing one's own payoff. In comparison, B's utility func?
tion becomes

(6) ub{t??a,t?b) = -0.1127t; + 1.1127T?, when nB < n?A,

when A is an outgroup match. When A is a match in the control sessions, we obtain

(7) ^b(K^b) = -0.049tt$ + 1.0497Tfl, when ttb < ttca.

Result 1 suggests that group identity affects people's distribution preferences differently,
depending on the relative positions. Participants show more charity, but less envy, when matched
with an ingroup member. Both effects, however, are consistent with putting more weight on an
ingroup match's payoff, compared to the control and outgroup matching. Furthermore, equations
(2)-(7) highlight the difference between our identity model and altruism models such as that of
Kaushik Basu (2006), where the weight on the other person's payoff is independent of payoff
distributions.
To formally investigate the effects of group identity on reciprocity, we use a logit model to
examine separate games of positive and negative reciprocity. In games of positive reciprocity,
player A's entry into the game is associated with good intentions, whereas in games of negative
reciprocity, A's entry reflects bad intentions.
In games in which A's entry shows good intentions, B's choice on whether to reward A can be
affected not only by A's group identity but also by other factors. Specifically, we consider three
other explanatory variables, including B's cost to reward A, A's benefit from B's reciprocation,
and B's payoff lag when B rewards A. Player B's cost of reciprocation is measured as her payoff
difference when choosing the reciprocating action over the alternative. Player A's benefit from B's
reciprocation is computed as the gain in A's payoff if B chooses to reciprocate. Player B's payoff
lag is measured by how much B's payoff falls behind A's when B chooses to reward A. Since, by
rewarding A, B gets a payoff that never exceeds her match's in all the positive-reciprocity games,
the difference in their payoffs enables us to examine how B's envy affects positive reciprocity.
Table 3 presents the results of logit specifications for factors that determine B's likelihood to
reciprocate. The coefficients are probability derivatives. The unit of these variables is 100 tokens
in the regressions.
Panel A presents the results of logit specifications for the control (column 2) and the treatment
(column 3). In column 4, we further interact each of the covariates with the ingroup dummy to
examine group-contingent effects. As the estimates in the treatment are largely consistent with
those in the control, we will focus on the former for our discussions.
Results in column 3 indicate that on average participants are significantly more likely to reward
ingroup members. An ingroup matching increases B's likelihood to reward A by 18.6 percent
(p < 0.01). Player B also cares about the outcome of her choice to reward A. Specifically, a 100
token increase in the benefit to A increases B's likelihood to reward by 8.9 percent (p < 0.01).
Furthermore, we find an effect of distributional concerns on positive reciprocity, i.e., player B is

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 444 THE AMERICAN ECONOMIC REVIEW MARCH 2009

Table 3?Logit Regression Determinants of Reciprocity

Panel A
Probability (B rewards A)
Control Treatment Treatment
Ingroup 0186 0117
(0 028) *** (0 083)
Cost to reward -0101 -0 041 -0 019
(0 055)* (0 034) (0 037)
Benefit to A if B rewards 0 206 0 089 0 055
(0 055)*** (0 033)*** (0 035)
B's payoff behind A if B rewards -0120 -0 078 -0 056
(0 047)*** (0 025)*** (0 027)**
(Cost to reward) x Ingroup -0 055
(0 033)*
(Benefit to A) x Ingroup 0 076
(0 025)***
(B behind A) x Ingroup -0160
(0 051)***
Constant -0 420 -0 282 -0 235
(0 199)* (0117)* (0 122)*
Observations 156 550 550
Log-likelihood function -94 58 -348 98 -34766
Pseudo R2 0113 0 063 0 067
Panel B Probability (B punishes A)
Control Treatment Treatment

Ingroup -0128 -0117

(0 027)*** (0 035)***
Cost to punish -0 206 -0 320 -0 262
(0 043)*** (0 038)*** (0 039)***
Damage to A if B punishes 0 028 0 043 0 035
(0 012)** (0 008)*** (0 008)***
B's payoff ahead of A if B punishes -0133 -0105 -0 080
(0 042)*** (0 025)*** (0 025)***
(Cost to punish) x Ingroup 0 084
(0 041)**
(Damage to A) x Ingroup -0011
(0008)
(B ahead of A) x Ingroup -0131
(0 030)***
Constant -0121 -0 056 -0 064
(0 042)*** (0 028)* (0 027)**
Observations 250 874 874
Log-likelihood function -110 65 -398 06 -395 72
Pseudo R2 0125 0191 0196

Notes Panel A includes Resp 5a, Resp la, Resp 2a, Resp 3, Resp 4, Resp 8, and Resp 9 Panel B includes Resp 2b,
Resp 10, Resp 11, Resp lb, Resp 6, Resp 7, Resp 12, and Resp 13a-d Standard errors in parentheses are clustered at
the individual level
*** Significant at the 1 percent level
** Significant at the 5 percent level
* Significant at the 10 percent level

less likely to return A's favor if doing so causes her to get a lower payoff than A. Specifically, a
100-token increase in the payoff gap decreases B's likelihood to reward A by 7.8 percent (p <
0.01 ). This suggests that envy restrains positive reciprocity.
Results in column 4 suggest that the explanatory variables exhibit group-contingent effects.
First, cost interacted with the ingroup dummy enters with a marginal effect ?0.055 (p < 0.10),

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VOL. 99 NO. 1 CHEN AND LI: GROUP IDENTITY AND SOCIAL PREFERENCES 445

which suggests a marginally stronger response to the cost of positive reciprocity toward an
ingroup than toward an outgroup match. Furthermore, given how much B's choice would benefit
A, B is more likely to reward an ingroup A, as indicated by the marginal effect of the interaction
between the variables Benefit to A and the ingroup dummy (0.076, p < 0.01). Lastly, the mar?
ginal effect of the interaction term of the ingroup dummy and how much B is behind A is -0.160
(p < 0.01), which suggests that the negative effect of envy on positive reciprocity is stronger
toward an ingroup match.
Panel B of Table 3 presents a similar analysis for the negative reciprocity games. The inde?
pendent variables include the ingroup dummy, B's cost to punish, the damage to A if B punishes,
and the payoff gap if B punishes. These variables are constructed in a similar way as their
counterparts in the analysis for positive reciprocity.18 In all the Pareto-damaging games, B, by
punishing, gets a payoff that either equals or exceeds A's. Hence, the design enables a compari?
son between participant charity concerns and negative reciprocity decisions. For the treatment,
we present results without the interaction terms in column 3 and those with the interaction terms
in column 4.
Results in column 3 indicate that ingroup matching significantly reduces the likelihood of
punishment by 12.8 percent (p < 0.01). This implies that B is more lenient toward misbehavior
by an ingroup player A. The likelihood to punish is sensitive to cost and the potential conse?
quence of punishment. A 100-token increase in B's cost lowers the likelihood of punishment
by 32.0 percent (p < 0.01), while a 100-token increase in the potential damage to A (who has
misbehaved) increases the likelihood of punishment by 4.3 percent (p < 0.01). In addition, B's
decision on whether to punish is affected by distribution preferences. A 100-token increase in
the payoff gap when B is ahead decreases the likelihood to punish by 10.5 percent (p < 0.01),
indicating that charity concerns suppress the likelihood to punish. Results in column 4 indicate
that group membership affects the likelihood to punish not only directly (-0.117, p < 0.01), but
also through its interactions with the cost of punishment and participant charity concerns. The
marginal effect of the interaction term of the ingroup dummy and B's cost to punish is 0.084
(p < 0.05), indicating that punishment is less price-sensitive toward an ingroup match. In other
words, a reduction in cost generates a smaller increase in B's likelihood to punish an ingroup
match compared to an outgroup match. Finally, the marginal effect of the payoff gap interacting
with the ingroup dummy is -0.131 (p < 0.01), which suggests that charity concerns suppress the
likelihood of punishment more toward an ingroup than toward an outgroup match.

RESULT 2 (Reciprocity): The participant reciprocity preference is significantly different

between ingroup and outgroup matches. Participants are more likely to reward an ingroup than
an outgroup match for good behavior. They are significantly more forgiving toward misbehavior
from an ingroup match compared to an outgroup match.

Support. In Table 3, the marginal effects of the ingroup match variable are 0.186 (p < 0.01) in
column 3 of panel A and ?0.128 (p < 0.01) in column 3 of panel B.
Result 2 indicates that participants are more likely to reward an ingroup member's good
behavior but less likely to punish an ingroup member's misbehavior. Both of these findings are
again consistent with putting more weight on an ingroup match's payoff, or being more altruistic
toward an ingroup match. Furthermore, the analyses provide insights into the connection between
distribution and reciprocity preferences. Specifically, an outcome with more equal payoffs will
increase the probability of both positive and negative reciprocity. Our positive reciprocity result

18 B's cost to punish is her opportunity cost when she chooses to punish A The damage to A if B punishes is com?
puted as the loss of A's payoff if B chooses to punish

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 446 THE AMERICAN ECONOMIC REVIEW MARCH 2009

Table 4?Proportion of SWM Decisions and the Effects of Social Identity

Matching conditions Alternative hypotheses and/7 values

Ingroup > Ingroup > Control >
Ingroup Outgroup Control Outgroup Control Outgroup
Player A 0 629 ?5?9 u~57 0 000 0047 0u48
[676] [676] [381]
Player B 0 68 0 529 0 638 0 000 0 095 0 001
[790] [790] [447]
Overall 0 656 0 520 0 606 0 000 0 022 0 000
[1466] [1466] [828]_
Notes Games Diet 5 Resp 5a and 5b and role B in game Resp 9 are exclu
gate payoff Number of observations is in square brackets p values are com
at the individual level

is consistent with Brent Simpson (2006), where, in sequentia

cooperation by a first mover, second movers are more likely
with an outgroup match 19 However, our negative reciprocity
in McLeish and Oxoby (2007), where in simple bargaining
response to unfair offers, responders engage in greater pun
This indicates that the effect of group identity on negative r
environment and the specific games
Next, we investigate the effect of group identity on the te
third important element in social preference We compute th
make SWM decisions for both the control and treatment ses
games, Diet 5, Resp 5a and 5b, and role B in game Resp 9, as
the same aggregate payoffs The results are presented in Tab
Table 4 reports the proportion of SWM decisions for Players
for three conditions ingroup matching (column 2), outgroup
sessions (column 4) Column 5 presents the /^-values for McN
for the alternative hypothesis that participants are more lik
matched with an ingroup member than when matched wi
presents the p-values for the test of proportions for the alte
in treatment sessions are more likely to choose SWM decisio
member than are participants in control sessions The last colu
the alternative hypothesis that outgroup matches are less lik
matches m control sessions

RESULT 3 (Social Welfare Maximization) Both players A an

to choose SWM decisions when matched with an ingroup me
outgroup member Compared with the control sessions partic
SWM decisions if matched with an ingroup member but less
outgroup member

Support Column 5 in Table 4 presents the /?-values for Mc

tion for matched samples, p < 0 01, for players A and B as w
by comparing the proportion of SWM decisions for ingroup v
6 presents the /7-values for the test of proportions, p < 0 0

19 In this treatment, all players were in fact second movers, and were led to believe that first movers existed and
cooperated

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VOL 99 NO 1 CHEN AND LI GROUP IDENTITY AND SOCIAL PREFERENCES 447
Table 5?The Effects of Social Identity on Expected and Actual Earnings

Matching conditions Alternative hypotheses and p-values

Ingroup > Ingroup > Control >
Ingroup Outgroup Control Outgroup Control Outgroup
Expected earnings
Player A 5215 507 6 5197 0 001 0 424 0107
[945] [949] [533]
Player B 504 6 459 2 485 8 0 000 0 054 0013
[938] [942] [536]
Overall 513 1 483 5 502 7 0 000 0114 0 016
[1,883] [1,891] [1,069]

Actual earnings
Player A 526 7 506 5 522 2 0 095 0 362 0127
[464] [487] [533]
Player B 5015 463 5 486 4 0 023 0 201 0100
[463] [485] [536]
Overall 514 1 485 0 504 3 0011 0198 0 057
[927] [972] [1,069]

Notes Earnings are in tokens Number of observations is in square brackets, /7-values are computed based on standard
errors clustered at the individual level

whereas p < 0.10 for player B, comparing the ingroup versus control sessions. Column 7 presents
the p-values for the tests of proportions, p < 0.05 for players A, B, and for all players, comparing
outgroup versus control sessions.
Result 3 indicates that group identity has a significant effect on the likelihood of SWM choices.
Comparing the treatment results with those from the control sessions, we find that participants
are significantly more likely to choose SWM actions for the ingroup matches, and are more
likely to withdraw SWM actions for the outgroup match. Result 3 predicts that, in games with a
unique Pareto-efficient outcome, people with salient group identities are more likely to choose
SWM actions when they are matched with an ingroup member. This prediction is consistent with
findings of previous experiments. For example, in a prisoner's dilemma game, participants are
more likely to choose cooperation when matched with an ingroup member (Goette, Huffman,
and Meier 2006). Similarly, in a voluntary contribution public goods game, participants are more
likely to contribute when they are matched with ingroup members (Eckel and Grossman 2005).
Given the results above regarding the effect of group identity on social preferences, we expect
that group identity will also have an effect on the final payoff. Next, we report the actual aver?
age earnings by role and experiment conditions. To extract the maximum information out of the
data, we also use simulations to compute each participant's expected payoff when she is matched
with every member of the opposite role in her session. For example, in the actual experiment, a
player A is randomly matched with one player B in her session and the payoffs for both players
are determined by their stated strategies. In the simulation, however, a player A is hypothetically
matched with every player B in her session. Her expected payoff is the average payoff she gets
from each match.
Table 5 reports the actual average earnings and the expected earnings for players A and B
and for all players, for three matching conditions: ingroup (column 2), outgroup (column 3),
and control sessions (column 4). Columns 5 to 7 present the alternative hypotheses, as well as
the p-values for paired-sample (column 5) and unpaired-sample (columns 6 and 7) /-tests. We
find that participants' actual average earnings and expected earnings are significantly higher
when they are matched with an ingroup member than with an outgroup member (p < 0.01 for
expected earnings andp = 0.011 for actual earnings over all players). Compared to the control

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 448 THE AMERICAN ECONOMIC REVIEW MARCH 2009

sessions, ingroup matching yields higher earnings, although the difference is not statistically sig?
nificant (p = 0.114 for expected and/? = 0.198 for actual earnings), whereas outgroup matching
yields significantly lower earnings (p ? 0.016 for expected and p = 0.057 for actual earnings).
Comparisons of expected earnings are all associated with higher confidence levels than those of
actual average earnings.20
Therefore, the induced group identity introduces a gap in earnings (actual average earnings
and expected earnings alike) between the ingroup and outgroup matches. This gap arises more
from the loss in outgroup matching than from the gain in ingroup matching, in comparison to the
control sessions. In other words, the economic outcome resulting from ingroup matching is made
only marginally better than the outcome in the control group. However, outgroup matching does
make agents significantly worse off compared to the scenario where there is no group.
In this subsection, we have examined the effects of group identity on three aspects of social
preference: distribution preferences, reciprocity preferences, and social welfare maximization.
With induced identity, when matched with an ingroup member, participants show more charity
when they have a higher payoff than their match, and less envy when they have a lower payoff.
Other things equal, participants are more likely to reciprocate positively to an ingroup than to an
outgroup match. They are more forgiving toward bad behavior from ingroup matches than to out?
group matches. Furthermore, participants are significantly more likely to choose SWM actions
when matched with an ingroup member. As a result, expected earnings are significantly higher
when participants are matched with an ingroup as opposed to an outgroup member.

B. What Creates Group Effects?

In this subsection, we address the question of what creates the group effects. An open ques?
tion from social identity research is whether pure categorization alone or generalized reciprocity
among ingroup members creates group effects. Results from prior research which largely focuses
on one or two games suggest that the answer might be game- and process-specific. By using a
large number of games, and various combinations of components to induce group identity, our
design is uniquely suited to answer this question.
Our Original treatment is not minimal, as criteria 1 (random assignment to groups), 2 (no
social interactions), and 4 (no link between choice and self interest) are not satisfied. However, it
provides a rich environment to evaluate the effects of various components through comparison
with other treatments. In this section, we investigate the effects of group assignment methods,
chat, other-other allocations, and a within- versus between-subject design. In assessing the effect
of each component, we use three types of analysis:

1. At the treatment level, we examine the proportion of subjects who differentiate between
ingroup and outgroup matches for within-subject treatments by using the test of propor?
tions.21 This information is summarized in Table 6.

2. At the game level, to investigate if treatments with different design components change
individual choices when facing an ingroup or an outgroup match, we first use the Fisher
exact probability test. We then use the Holm-Bonferroni procedure to correct for possible

20 Appropriate recombination of individual strategies in simulations can improve the efficiency of the estimation
See Charles Mulhn and David Reiley (2006) for related techniques
21 We also examine the proportion of decisions that are different between ingroup and outgroup matches, and find that
the results are similar except in one case NoChat and NoHelp are significantly different in role B decisions (p = 0 07
for role A and/7 = 0 01 for role B) However, the decision-level analysis treats each decision as an independent observa?
tion, so the difference might be overestimated Therefore, we choose to report the individual-level results

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VOL 99 NO 1 CHEN AND LI GROUP IDENTITY AND SOCIAL PREFERENCES 449

Table 6?Proportion of Participants Who Differentiate between Ingroup and Outgroup Matches

Original NoChat NoHelp RandomWithin

Propor twn of participants who differentiate
Role A 0 39 0 45 0 56 0 34
RoleB 0 39 0 45 0 56 0 44

Original vs RandomWithin Original vs NoChat NoChat vs

p-values of two-sided test foi the equality of proportions
Role A 0 65 0 33 0 32 0.06
RoleB 0 60 0 36 0 32 0 06

multiple comparisons.22 All p-values are two-tailed. The diff

cally significant if the Holm-Bonferroni adjusted /rvalue is le

3. At the affective level, we analyze self-reported group attach

survey by using OLS and ordered logit regressions.

In the post-experiment survey, subjects report the strength o

a scale between 1 and 10, where a higher score represents stro
pool all treatments and use OLS and ordered logit models to in
self-reported group attachment. The independent variables i
Paintings, Chat, Other-Other Allocation, and Within-Subject
for treatments where subjects are grouped based on their pain
random assignment; Chat equals one for treatments with ch
Other Allocation equals one for treatments containing the ot
zero otherwise; and Within-Subject equals one for all within-
otherwise.

Table 7 indicates that both the OLS and ordered logit models yield consistent results on how
various design components affect group attachment. We include both specifications, as the
OLS coefficients have more straightforward interpretations than those of the ordered logit.

We first examine group assignment methods. In our Original treatment, participants are
assigned to groups based on their true painting preferences, while in the RandomWithin and
RandomBetween treatments, they are randomly assigned to groups. The latter conforms to the
first criterion in the minimal group paradigm in psychology. To evaluate any systematic differ?
ence between random assignment and assignment based on true painting preferences, we com?
pare the Original and the RandomWithin treatments, which differ only in group assignment
methods. Comparing these two treatments, we find no significant difference in the proportion
of participants who differentiate between ingroup and outgroup matches (p = 0.65 and 0.60 for
roles A and B, respectively, two-sided test of proportions). At the game level, we find no signifi?
cant behavioral difference between the two treatments (p > 0.05 for role A, p > 0.10 for role

22 Holm-Bonferroni correction is applied since we conduct four pairs of treatment-wise comparisons on the game
level, i e , Original versus RandomWithin, Original versus NoChat, NoChat versus NoHelp, and Random-Within ver?
sus Random-Between, which are subject to potential multiple-comparison problems See Yoav Benjamini and Yosef
Hochberg (1995) for detailed discussions on the Bonferroni-type procedure We thank an anonymous referee for sug?
gesting this test

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 450 THE AMERICAN ECONOMIC REVIEW MARCH2009

Table 7?Effects of Design Components on Self-Reported Group Attachment

Self-reported group attachment

Dependent variable OLS Ordered logit
Paintings 0 260 0 210
(0 653) (0 486)
Chat 1135 0792
(0 216)*** (0 121)***
Other-other allocation -0 313 0 010
(0 308) (0114)
Within-subject -1 187 -0 817
(0778) (0 544)
Constant 4178
(0 551)***

Observations 426 426

R2 0 04 0 014

Notes Standard errors are clustered at the session level R2 is th

*** Significant at 1 percent level

B, Fisher exact probability tests with Holm-Bonfer

methods do not affect self-reported group attachm
This result indicates that the two group assignmen
in participant behavior or attitude in any of the 24
significant difference in participant behavior in any
advantages over group assignment based on particip
experimenter demand effects. We do not preclude
preferences might induce behavioral differences in
experiments, random assignment is an important m
lent groups. To our best knowledge, the only field
is Goette, Huffman, and Meier (2006). We therefor
groups whenever possible.
Next, we separately investigate the effects of the
other-other allocations. Both components could i
own group. We evaluate the effects of these compo
Fundamentally, we want to address the question of w
tion sufficient, or is it necessary for group member
To investigate the effects of the online chat stage
treatments. Compared to the Original treatment, t
chat stage, while everything else remains the same
no significant difference in the proportion of partic
outgroup matches (p = 0.33 and 0.36 for roles A and
no significant behavioral difference between the tw
game Resp 2a. In this game, the fraction of As who
the Original treatment and 0.31 in the NoChat treatm
to significantly stronger ingroup favoritism (p = 0.0
higher in the treatments with Chat (p < 0.01). In Ta
dummy are 1.135 (p < 0.01) in OLS and 0.792 (p <
result indicates that, while online chat has a signific
games, it does significantly increase self-reported gr
group identification process.

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VOL 99 NO. 1 CHEN AND LI: GROUP IDENTITY AND SOCIAL PREFERENCES 451

To investigate the effects of the other-other allocation stage, we compare the NoChat and
NoHelp treatments. While the former takes away the online chat stage, the latter takes away
both the online chat and the other-other allocation stage. Comparing these two treatments, we
find no significant difference in the proportion of participants who differentiate between ingroup
and outgroup matches (p = 0.32 for both roles, test of proportions). At the game level, the Fisher
exact probability tests corrected by the Holm-Bonferroni procedure show no significant behav?
ioral difference in any of the games (p > 0.05). Lastly, the other-other allocation has no sig?
nificant effect on self-reported attachment to groups. In Table 7, the coefficient estimates of the
Other-other allocation dummy are -0.313 (p > 0.10) in OLS and 0.010 (p > 0.10) in ordered
logit, respectively. This indicates that, unlike in Turner (1978), the other-other allocation stage
has no significant effect on participant behavior, nor the self-reported attachment to groups in
our experiments.
Although the increase in the proportion of individuals who make group-contingent choices in
the NoChat (0.45) and the NoHelp (0.56) treatments is not significant (p ? 0.32), it does indicate
that the other-other allocation stage might actually decrease group-contingent behavior, possibly
by a crowding-out effect. Specifically, with the other-other allocation stage, individual could
make costless group-contingent choices, and might not feel obliged to make as many (costly)
group-contingent choices in the subsequent allocation games, as in the treatment without other
other allocations.
When we compare the NoHelp with the Original treatments in Table 6, 56 percent of the
participants in the NoHelp treatment (as opposed to 39 percent in the Original treatment) make
group-contingent decisions. The difference is weakly significant (p ? 0.06). In addition to the
possible crowding out effect, we conjecture that group effect induced by categorization dete?
riorates over time. The larger proportion of group-contingent choices in the NoHelp treatment
might be due to the fact that the sequential games took place immediately after the group catego?
rization, rather than one or two stages later. Even though the online chat has a moderate boost
in group attachment, it may not be sufficient to offset the deterioration of group effect. Our data
offer some supporting evidence.23 An improved design should control for the time between group
assignment and the two-person sequential games, by giving subjects an individually completed
task, which takes the same amount of time as that of the chat and other-other allocation stages.
Lastly, we evaluate the effects of within- versus between-subject design. In our Original treat?
ment, for each game, participants make two decisions, one under each of two scenarios when
they have an ingroup and an outgroup match. This, again, might be subject to an experimenter
demand effect. It also makes the presence of an outgroup more salient. To investigate the extent
to which the presence of an outgroup affects behavior, we compare the RandomWithin and the
RandomBetween treatments. Note that the test of proportions of group-differentiating partici?
pants at the treatment level cannot be applied here, as in the RandomBetween treatment each
subject makes only one decision in each game, with either an ingroup or an outgroup match,
while in the RandomWithin treatment they make two decisions under both scenarios. At the
game level, we find no significant behavioral difference for both players A and B (p > 0.10).
Self-reported attachment is not significantly different. In Table 7, the coefficient estimates of the
Within-subject dummy are -1.187 (p > 0.10) in OLS and -0.817 (p > 0.10) in ordered logit,
respectively, and not significantly different from zero.
On the methodological level, the analysis from this section, together with findings from other
laboratory experiments on group identity, teaches us several lessons. To induce group identity in
the laboratory, random assignment is as effective as group assignment based on participant true

23 Looking at the allocation games stage in all within-subject treatments, we find a 1 percentage point decrease of
group-contingent choices per game (p < 0 02)

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452 THE AMERICAN ECONOMIC REVIEW MARCH 2009

painting preferences. Furthermore, a between-subject design induces the same level of group
effects as a within-subject design. To enhance and strengthen group identity, a problem-solving
stage, such as an online chat or puzzle-solving, can increase group attachment and might have
a moderate effect on behavior, while the other-other allocation does not have significant group
effect.
On a psychological level, our analyses shed light on what creates group effects. In our set of
games, dividing people into different groups, by random assignment or weak preferences, in
itself can generate group effects. Helping tasks, which presumably creates generalized reciproc?
ity, can enhance and strengthen attachment to groups. Furthermore, based on prior research and
our own study, we find that group effects differ across games. Therefore, it would be useful to
be able to make out-of-sample predictions on whether one is likely to observe the translation
of group effects to behaviorial differences in new games. One starting point is to use the trans?
formed utility functions, equations (2)-(7), for out-of-sample forecasting.

IV. Conclusion

Social identity theory has been applied to a broad array of issues across the social sciences,
including prejudice, stereotyping, social competition, negotiation, language use, motivation and
commitment, collective action, and industrial protest (Alexander Haslam 2004). Although it was
only recently introduced into economics (Akerlof and Kranton 2000), it has the potential to
shed light on many interesting economic issues and provide a novel and refreshing alternative to
established theories.
Empirical work on social identity theory in social psychology focuses largely on other-other
allocation games, where participants' benefits are not affected by their allocation decisions, and,
more recently, on variants of the prisoner's dilemma game. To formalize social identity theory
mathematically and use it to analyze economic problems, it is important to systematically mea?
sure the effects of identity in a large class of games in the economic domain. This study does so
by investigating the effects of identity on social preferences through 24 two-person sequential
games in the laboratory.
In our experiments, we induce group identity by using different group assignment methods
(classical Klee and Kandinsky paintings or random assignment), enhance group attachment by
combinations of a problem-solving task and an other-other allocation game (in some treatments),
and estimate group effects using 24 self-other sequential allocation games. We use the latter to
measure the effects of group identity on various aspects of social preferences, including distribu?
tion, reciprocity, and SWM actions.
We find that group identity has a significant effect on distribution preferences. When par?
ticipants are matched with an ingroup member (as opposed to an outgroup member), they show
more charity when they have a higher payoff; however, they show less envy when they have a
lower payoff. Both results are consistent with participants putting more weight on the ingroup
match's payoff in their own utility function.
We also present the empirical evidence for the effects of group identity on participant reci?
procity preferences. Rather than taking an ingroup match's good intentions for granted, partici?
pants are significantly more likely to reward an ingroup match for good behavior, compared to an
outgroup match. Furthermore, they are less likely to punish an ingroup match for misbehavior.
Finally, we find that participants are significantly more likely to choose SWM actions when
matched with an ingroup member. As a result, ingroup matching generates significantly higher
expected earnings compared to outgroup matching.
Compared to the social psychology research on social identity, this study differs in several
important aspects. First, the set of games is much larger and varied, including the other-other

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 VOL. 99 NO. 1 CHEN AND LI: GROUP IDENTITY AND SOCIAL PREFERENCES 453

allocation games from social psychology and a variety of sequential games involving different
degrees of conflict of interest between self and other. This feature leads to a more robust esti?
mate of our empirical model. Second, our empirical model of social identity and social prefer?
ences, which is calibrated over a large set of games, can make out-of-sample forecasts on a new
set of games, and thus can explain disparate findings from prior research. In comparison, the
behavioral principles from social psychology research are not sensitive to the game parameters
or the economic environment, which leads to less precise predictions. Third, we systematically
investigate the effects of different components in the experimental design. By using pairwise
comparisons of our five treatments, we are able to provide a comprehensive answer to the ques?
tion of what creates group effects. We find that pure categorization itself is sufficient to create
group effects, which might manifest itself differently in different games. By comparison, group
problem-solving, such as online chat, significantly increases attachment to groups, but does not
change behavior significantly in most of our games. Finally, we use real monetary incentives and
no deception in our protocol.
This paper makes two contributions to the economics literature. The first contribution is a
framework for the empirical foundation for incorporating identity into economic models. One
area of economics in which social identity theory might prove especially valuable is the econom?
ics of organizations. Our results suggest that instead of modeling identity as a substitute for mon?
etary rewards and thus a cost-saving device, a more prominent effect of identity is the increased
likelihood of SWM actions and positive reciprocity.
A second contribution of this paper is its practical implications for organization design. In
neoclassical economics, the traditional approach to mechanism design relies heavily on incen?
tives derived from Taylorism. However, this theory is silent about whether a deep sense of iden?
tity among employees within the firm is a worthwhile investment. Despite this lack, examples
of identity creation abound. Nike founder Phil Knight and many of his employees have tattoos
of the Nike "swoosh" logo on their left calves as a sign of group membership and camaraderie
(Camerer and Ulrike Malmendier 2007). Standard economic theory does not have an explana?
tion for such phenomena. Our results suggest that creating a group identity would induce people
to be more helpful to each other, and to increase the likelihood of SWM actions, which would
improve payoffs for all relevant parties?the principal (firm) as well as the agents (workers). The
use of social identity as a design tool is a promising direction of research, especially in environ?
ments where monetary incentives are limited, such as online communities (Yuqing Ren, Robert
E. Kraut, and Sara Kiesler 2007).
There are several directions for fruitful future research. On the theory front, a formalization
of group identity and its applications to various domains of organization design would help us
better understand the effect of social identity on optimal contract and organizational hierarchies.
On the empirical front, it would be interesting to explore the impact of social identity in practical
mechanism design in the laboratory and the field.

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454 THE AMERICAN ECONOMIC REVIEW MARCH 2009

Appendix: Sequential Games with Self-Other Allocations

Table Al?Games and Summary Statistics

Percent A Percent B
Control Diff Diff
A stays out If A enters, B chooses Out Enter Left Right
Two-person dictator games
Diet 1 (400,400) vs (750,400) 0 33 0 67 0 26
Diet 2 (400,400) vs (750,375) 0 82 0 l8 0 26
Diet 3 (300,600) vs (700,500) 076 0 24 0 24
Diet 4 (200,700) vs (600,600) 0 50 0 50 0 29
Diet 5 (0,800)vs (400,400) 064 0 36 0 24
Two-person response games B's payoffs identical
Resp la (750,0) (400,400) vs (750,400) 0 29 071 0 32 0 68 0 21 0 22
Resp lb (550,550) (400,400) vs (750,400) 070 030 039 061 0 32 0 24
Resp 6 (100,1000) (75,125) vs (125,125) 0 30 070 035 065 0 21 0 24
Resp 7 (450,900) (200,400) vs (400,400) 0 83 017 013 0 87 014 017
Two-person response games B's sacrifice helps A
Resp 2a (750,0) (400,400) vs (750,375) 0 59 041 073 027 0 30 015
Resp 2b (550,550) (400,400) vs (750,375) 0 95 005 064 036 014 0 20
Resp 3 (750,100) (300,600) vs (700,500) 0 82 018 0 55 045 019 0 24
Resp 4 (700,200) (200,700) vs (600,600) 0 55 045 0 23 077 0 30 0 27
Resp 5a (800,0) (0,800) vs (400,400) 0 81 019 045 055 0 24 018
Resp 5b (0,800) (0,800) vs (400,400) 0 00 1 00 0 64 0 36 0 04 0 29
Resp 8 (725,0) (400,400) vs (750,375) 074 0 26 0 83 0 17 0 24 015
Resp 9 (450,0) (350,450) vs (450,350) 074 0 26 0 87 013 0 22 0 08
Two-person response games B's sacrifice hurts A
Resp 10 (375,1000) (400,400) vs (350,350) 0 38 062 095 0 05 0 26 0 06
Resp 11 (400,1200) (400,200) vs (0,0) 0 82 018 091 009 0 21 0 07
Resp 12 (375,1000) (400,400) vs (250,350) 0 22 078 096 004 011 015
Resp 13a (750,750) (800,200) vs (0,0) 0 83 017 091 009 0 08 010
Resp 13b (750,750) (800,200) vs (0,50) 074 0 26 0 83 017 013 014
Resp 13c (750,750) (800,200) vs (0,100) 078 0 22 078 0 22 010 019
Resp 13d (750,750) (800,200) vs (0,150) 0 87 013 091 0 09 0 08 017

Note Column "Percent A Diff (Percent B Diff) refers to the percentage of player A (B) decisions that differentiate
between ingroup and outgroup matches in treatments

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VOL 99 NO 1 CHEN AND LI GROUP IDENTITY AND SOCIAL PREFERENCES 455

Table A2?Summary Statistics in Treatment Sessions

Ingroup Outgroup
Two-person dictator games
Out Enter Left Right Out Enter Left Right
Diet 1 0 30 070 0 45 0 55
Diet 2 0 67 0 33 073 0 27
Diet 3 0 68 0 32 0 86 014
Diet 4 0 34 0 66 0 63 0 38
Diet 5 0 56 0 44 077 0 23

Two-person response games B's payoffs identical

Resp la 046 0 54 0 26 074 0 63 0 37 0 48 0 53
Resp lb 0 66 0 34 0 39 0 61 0 80 0 20 0 55 0 45
Resp 6 0 46 0 54 018 0 83 0 36 0 64 0 33 0 68
Resp 7 0 95 0 05 010 0 90 0 83 018 0 29 071

Two-person response games B's sacrifice helps A

Resp 2a 0 46 0 54 0 67 0 33 073 0 27 0 80 0 20
Resp 2b 0 88 013 0 68 0 32 0 84 016 0 84 016
Resp 3 075 0 25 0 56 0 44 0 88 013 073 0 27
Resp 4 0 57 0 43 0 35 0 65 0 84 016 0 58 0 42
Resp 5a 0 75 0 25 046 0 54 0 89 011 0 59 041
Resp 5b 0 04 0 96 0 54 0 46 0 03 097 076 0 24
Resp 8 0 63 0 38 0 66 0 34 0 81 019 076 0 24
Resp 9 0 60 0 40 0 69 0 31 079 0 21 078 0 23

Two-person response games B's sacrifice hurts A

Resp 10 0 46 0 54 099 0 01 0 28 073 096 0 04
Resp 11 076 0 24 0 95 0 05 0 57 043 0 89 011
Resp 12 0 44 0 56 0 93 0 08 0 34 0 66 0 80 0 20
Resp 13a 0 89 011 095 0 05 0 81 019 0 86 014
Resp 13b 079 0 21 0 90 010 078 0 23 0 84 016
Resp 13c 0 85 015 0 91 0 09 0 81 019 073 0 28
Resp 13d 0 85 015 0 81 019 0 84 016 0 68 0 33

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