We advance a novel choice-theoretic model of “identity” based on the notions of categories and narratives. Identity is conceived as a matter of “reflexive perception” — how people understand themselves. Choosing an identity is equivalent to making a generalization about one’s past that highlights the most salient aspects of experience. When many individuals make a common choice in this regard, they embrace a collective identity which is dysfunctional if it is Pareto dominated by an alternative self-classiﬁcatory schema. Using a simple multi-stage risk sharing game, we explore conditions under which dysfunctional collective identities might be expected to emerge.
Fang, Hanming and Loury, Glenn C., "Toward An Economic Theory of Dysfunctional Identity" (2004). Cowles Foundation Discussion Papers. 1765.