The impact of group identity on experimental markets with externalities

Michalis Drouvelis and Francisco Gomez-Martinez

European Economic Review, 2023, vol. 158, issue C

Abstract: Existing evidence demonstrates that the degree of social homogeneity in a society correlates with various economic indicators. Using experimental techniques, we establish the causal impact of social distance on socially responsible behavior, market prices, market efficiency and income inequality. We develop an experimental market where low-cost production generates a negative externality to a third party, while high-cost production eliminates the externality. We compare behavior in groups varying whether the third party shares a common identity with buyers and sellers (in-group condition) or not (out-group condition). Our findings indicate that socially responsible behavior is generally robust across our treatments. However, boosting group identity improves economic welfare indicators, as it leads to a striking reduction of economic inequality through changes in market price levels and improves market efficiency. Overall, our experiment shows that the social environment of market interactions matters a great deal and has significant implications for the design of institutions.

Keywords: Social responsibility; Group identity; Markets; Inequality; Laboratory experiment (search for similar items in EconPapers)
JEL-codes: C92 D03 D62 M14 Z13 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:158:y:2023:i:c:s0014292123001721

DOI: 10.1016/j.euroecorev.2023.104544

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