I review evidence that individuals associate themselves—or identify—with groups in two fundamental ways: ingroup bias and conformity to group norms. The evidence spans many spheres of economic activity, including consumption, production, hiring, promotion, education, cooperation, financial investments, and law enforcement. Group identities are not fixed, even when it comes to ethnic and religious identities. I argue that the choice of identity can be captured by a simple trade-off between gains from group status and costs to distance from the group. I outline a simple conceptual framework that captures the main empirical regularities and illustrate how it can be used to study the two-way interaction between economic policy and social identity. The analysis implies, e.g., that inequality and immigration of low-skilled workers can strengthen nationalism and reduce redistribution, and that changes in the economic environment can produce shifts in identification patterns that feed into trade policy. Finally, I discuss open theoretical questions and domains where the interaction between identity and economic activity is not well understood. This includes the provision of public services, the evolution of gender norms, and the use of identity to motivate workers.
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