Stereotypic wage and accentuation effect

Abstract

The paper extends the work of Akerlof and Kranton [2004] on social identity and economics of organization to an adverse selection framework. The inclusion of social identity in the principal’s problem alters the contracts offered to the agents. A pooling contract is a Pareto optimal contract when the agent attaches greater weight on conformity to ideal behavior prescribed by group membership. Precisely how this pooling contract is characterized depends on the ideal behavior of the agent. This result is generalized when social interaction and social influence among members of different groups are allowed. Using the concept of accentuation effect in social psychology, the model provides theoretical justifications for the existence of a representative (or stereotypic) wage for a given social category.

JEL classification: J41, Z13