Identity economics and Sudan, from 1997, working draft

1. Can There Be an 'Identity Economics'?
Michael Kevane
Department of Economics
Santa Clara University
Santa Clara, CA 95053
mkevane@scu.edu
Draft 1997

2. 1. Introduction
Recent formalization of the question of how identity affects the
allocation of goods and resources motivates this review of the
economics of identity in the context of northern Sudan. The formal
models provide sharper pictures of exactly how and why identity
matters. Those abstract pictures may be used as templates to be fitted
against the more blurry and fuzzy (and perhaps more real) pictures
produced by anthropologists and field workers. Whether the fitting
will be successful is an open question; both the formal models and the
texts produced through interactive fieldwork remain underdeveloped.
Nevertheless, the importance of understanding identity in the context
of northern Sudan, and in Africa more generally, makes the attempt
worthwhile.
Identity has always been important in northern Sudan. In the
rural areas of central Kordofan, for example, political leadership is
contested by ethnic groups. In the village of Bireka the Bederi and
Tomami leaders were at great pains to exclude Hausa villagers from
participation in formal political structures. A nearby Burgo village was
prevented from electing its own sheikh, on the grounds that the village
'belonged' to other ethnic groups, even though none lived in the village.
Further south, what Baumann (1987) once referred to as
'redintegration' of Nuba into Sudanese identities seems to havetaken a
sharp turn towards 'dis-integration', and a local uprising on behalf of
'the Nuba' has led to large-scale violence. The increase in violence in
southern Kordofan has now been matched by explosive military
situations in the west and east. In Darfur state, government armed
militias organized along ethnic lines hold considerable power. In the
east, the expansion of the ongoing civil war into the Kassala area along
the Eritrean and Ethiopian borders means that for the first time
different groups in the traditional ‘north’ of Sudan are fighting pitched
battles.
The descent into violence, hitherto directed against the
southern populations, has naturally strengthened and exacerbated an
already pronounced tendency to resolve political issues along identity
lines. Unlike most African political parties, the main parties of northern
Sudan since the 1970s (when the large Communist Party was

3. 2
destroyed) have been outgrowths of religious movements. The parties
characteristically emphasize identity issues over economic or social
issues, defending their positions by appealing to the embracing nature
of Islam. The expansion of the civil war demonstrates more clearly the
irreconcilability over the long term of competing identities that claim
universality (in the Sudanese context).
In this atmosphere of identity politics it may be constructive to
deconstruct identity. One dimension of that deconstruction is an
analysis the economics of identity. Identity may be demystified by
showing its functionality and even profitability; in essence, by showing
that identity may be ‘endogenous’, the reader may be less likely to treat
it as ‘essential’. Thus, the project of analyzing identity formally is
complementary to the project of deconstructing identity by
demonstrating the historically contingent nature of the ‘invention’ of
identities.
2. Identity as a set of markers
We may think of identity as a set of visible markers attached to
individuals.i Everyone thus has an individual identity, consonant with
the visible markers of the body. People also have character traits or
other visible markers (like facial scars) that reveal their identity.
Identities may be ‘inherited’; Boddy (1989:76) observes that in the
village of 'Hofriyat' in northern Sudan, "Children born out of wedlock
lack an essential morality with which the legally born are innately
imbued. Awlad haram, 'forbidden children,' are thought to be criminals
by nature." Abbas (1974) notes that in the initial scenes of The
Wedding of Zein Tayeb Salih describes many forms of identification that
'define boundaries': the village; other settlements peripheral to the
village; factions within the village; and finally 'people who are
abnormal', 'untouchables' like Deaf Ashmana and Musa the Lame,
people identified by their stigma.
The identities we care about in this paper, the ones that matter
for identity economics, are collective. When identity is defined by skin
color, the sense of collective identity defined by visible markers is clear.
Behavioral traits (how to sit, what clothes feel comfortable, how to
shake hands) are also quite visible collective markers. The kind of
collective identity we will be particularly concerned with in this paper

4. 3
is ethnicity.ii Ethnicity is not the only form of collective identity; the
nation, the village, the religious tariga, are all 'imagined communities'
that inspire feelings of identification, and contain ascriptive markers.
Ethnicity, however, seems to be especially important in structuring
economic transactions in northern Sudan.
One important feature of collective identities is that individuals
can change them only at considerable cost. Tayeb Salih illustrates the
costliness of identity changes in his novel Seasons of Migration to the
North. The narrator of the novel is extraordinarily concerned with his
incorporation into village society after a long absence. At one point he
complains, referring to the central character Mustafa Saeed, the
stranger who has been incorporated into the village: "Look at the way
he says 'we' and does not include me, though he knows this is my
village and that it is he- not I- who is the stranger" (p. 9). The narrator's
concern over identity has dire political consequences:whenconfronted
with old Wad Rayyes decision to marry the youngwidowHosnaheflees
to the capital Khartoum rather than risk a confrontation with the
villagers. As Abbas (1979) put it: "Having decided that a breach with
the village over Hosna's marriage to Wad Rayyes would ensure his [the
narrator's] exclusion from the community, he is anxious to extricate
himself from his painful dilemma." The villagers uphold Wad Rayyes,
and Hosna kills him and commits suicide the night of their marriage.
The narrator returns to the village to find himself excluded from the
community for his failure to act. In his despair he tries to drown
himself, but in the middle of the river he realizes that he can draw on
inner sources of authenticity and identity, rather than on a
romanticized identity as a 'villager'. He is able to renounce his identity
as a villager only after the death of Hosna and his own attempted
drowning. Personal identities indeed have tremendous psychological
effects on individuals. It seems proper to think of identity as being a
least somewhat ‘sticky’.
3. Economic effects of identity‐contingent equilibrium strategies
Let us assume for the moment that identity is inherited from
parents and is too costly to change, and that identities are shared by
large groups of people.iii Why is identity important in economic

5. 4
activity? The economic world modeled by economists is after all
typically anonymous.
One reason commonly put forward for explaining the
importance of identity is that people act along identity lines in order to
acquire goods that are allocated through non-market mechanisms
(Nielsen, 1985; Kuran, 1995). These mechanismsareoftenamenableto
manipulation by organized groups. Ethnic groups that are large or
more ‘solidary’ can out-vote small groups, they can organize bigger
demonstrations, they can threaten more violence. Ethnic behavior in
particular is often supposed to be associated with the rise of the state;
once the state assumes the monopoly over distribution of significant
goods and services, then individuals are interested in using ethnic
groups to compete for those resources.
A related reason used to explain the persistence of ethnic
groups is that they are really forms of social organization for providing
public goods (Hechter 1987).
The reason identity matters in economics is that people (and
also corporate actors) in an economy very often have equilibrium
strategies predicated on identities. These strategies typically include
sanctions against those who engage in proscribed actions. The
sanctions are conditioned on the identities of transactors. Whenpeople
use shared strategies that include sanctions and are conditioned on
identities, these may properly be called norms. Coleman (1987:135) is
explicit in this regard: “Norms are expectations about action- one’s own
action, that of others, or both- which express what action is right or
what action is wrong.” Berger and Luckman (1967:54) express the idea
in a similar fashion: “Institutionalization occurs whenever there is a
reciprocal typification of habitualized actions by type of actors... What
must be stressed is the reciprocity of institutional typifications and the
typicality of not only the actions but also the actors in situations... The
institution posits that actions of type X will be performed by actors of
type X.” An important point is that the norms themselves do not need
to be the result of optimizing choices. People are socialized into a
world of norms.iv
An individual has to worry about norms, and thus about his or
her identity, because of the consequences of violating norms. Norms
that are internalized, so that they directly constrain the actions a

6. 5
person might wish to take, have been analyzed by Akerlof (1983) and
are discussed in Coleman (1987). Violating an internalized norm may
be ‘impossible’, or very costly, in the same way that someone trained
for years not to look another person in the eye may find himself or
herself deeply disturbed when they have to change their behavior.
Elster (1989) thinks of norms as a kind of "craziness" that has a "grip on
the mind". Stigma- marks of shame- may for instance be felt to be
overwhelming indicators of self, and may be used by others to define
persons and the actions they may take with those persons.
But norm internalization is not necessary for identity to matter.
Norms may be sustained via external sanctions. Recent literature has
devoted considerable attention to demonstrating and exploring the
range of norms that might be self sustaining in equilibria with
individually-rational actors- that is, with actors who pursue their own
interests and are not burdened with constrained selves. Theremainder
of this section develops a typology of these norms, depending on
whether the norms are about the terms of transactions appropriate for
actors of different identities or whether they are about the
consequences of improper fulfillment of the terms of transactions
according to the identities of the transactors. In keeping with the
literature, we focus attention exclusively on situations where
transactions are bilateral, and thus classify agents into two groups,
insiders and outsiders. Of course, an outsider for one group is an
insider for his or her own group.
Table 1 summarizes the five kinds of situations where norms
structure transactions.
The first situation is where insiders have norms about the terms of
their transactions with outsiders. The second situation is where
insiders have norms about the transactions of outsiders among
themselves. The other three situations are where insiders have norms
about actions to take upon the improper fulfillment of transactions by
insiders transacting with insiders, by outsiders transacting with
insiders, and by insiders transacting with outsiders. We consider each
case in turn.
i. Insiders sanction other insiders who trade improperly with outsiders
The simplest and classic case of an ethnic group having a norm
that affects economic behavior is group discrimination. An ethnic

7. 6
group may share a norm about the terms of transactions when insiders
transact with outsiders. For instance, an ethnic group may enforce a
collusive low wage by agreeing to hire members of another ethnic
group at a low wage. Or members of the group may decide to sell their
products to outsiders at high prices only. Osmani (1989) has analyzed
the case where a group may have a norm about not hiring themselves
out for low wages; that is, where workers collude to earn monopoly
rents on their labor. That such equilibria are sustainable is well-known.
Maintaining ethnic discrimination requires sanctions; justlikeacartel,
it is in the interest of every member of the discriminating group to try
to cheat at the margin, maybe by hiring a worker at a slightly higher
wage in order to obtain more labor, maybe by selling goods at a slightly
lower price. For discrimination to work groups must have norms that
include sanctions for violators of the code. These sanctionsmayinvolve
ostracism and exclusion, or may be simply a reversion to competition.
Recent work by Collier and Garg (1996) provides evidence of
local ethnically based discrimination in labor markets. They show that
Ghanaian workers in the public sector earn a 25% premium if they
belong to the dominant ethnic group of the area where they work, andif
they are likely to be related through kinship to members of the
dominant ethnic group. That is, migrants into an area who belong to
the same ethnic group as the dominant one do not receive a premium-
only locals do. The results are, however, open to interpretation; it is
also reasonable to think that if the good public sector jobs are rationed
and go to applicants who belong to information networks where they
might learn about jobs, then non-discriminatory strategies might lead
to the same outcome, subject to historical accident of the locally
dominant ethnic group being over-represented in local public
enterprises.
Researchers working in northern Sudan are only beginning to
understand the nature of ethnic discrimination in the labor market.
O’Brien (1984) has conducted perhaps the most in-depth inquiries into
this topic and argues that ethnic discrimination was extensive but
declined rapidly with the improvements in transportation,
communication and labor demand that led to national labor markets
during the 1970s and 1980s.

8. 7
Sharednormsaboutpropertransactionswithmembersofother
ethnic groups need not be collectively rational to be sustainable.
Akerlof (1984) considers the caseofraceorcastediscrimination,where
members of a group decline to work with members of other groups.
While this hurts individuals in the group, they are nevertheless
reluctant to violate the norm because they fear other group members
will sanction them. Krueger (1968) developed the felicitous analogy
between norms of behavior towards other ethnic groups and
international tariffs. Members of a nation place tariffs on ‘foreign’
goods, those produced or sold by members of other national groups.
The tariffs are sustained by the threat of group punishment, more often
through the legal system but sometimes, as in Detroit, by the threat of
‘sabotage’ and ostracism. While followingthenormmaybeindividually
rational, the effects of distorting comparativeadvantagearecollectively
irrational.
One example of the persistence of disadvantageous social
customs may be the well-known reluctance of ‘Arab’ tenants on the
irrigated Gezira scheme to sell their tenancies to more productive
‘Westerners’ who often work as sharecroppers. The scheme originally
allotted tenancies to local families, and encouraged the settlement of
Hausa and other migrants to work as laborers. Many of the Westerners
proved successful farmers (many arrived in Sudan with much of their
wealth), and many of the Arab tenants proved less successful (often
having little experience in irrigation and higher opportunity costs
because of access to education and urban employment). But the Arabs
seem to have a norm: tenants should not sell their tenancies to
Westerners. If someone were to sell a tenancy, the other Arabs would
boycott and ostracize that person. The Westerners who buy may also
fear being surrounded by uncooperative neighbors, about which more
below.
ii. Insiders threaten collective punishment to extract surplus from
outsiders
Group privilege may be sustained if group members employ
strategies of sanctioning violators of a code of behavior. The Joama' of
eastern Kordofan, for example, were reputed to be good cotton pickers
and thus commanded higher wages in the labor market. But, according
to O’Brien (1986), their reputation was eroded as employers hired

9. 8
more and more labor from different ethnic groups, until finally their
wage premium disappeared. TheJoama’couldhaveperhapspostponed
the erosion of their privileged position in the work force by using the
same strategies that union workers- the 'labor aristocracy'- use against
excluded non-union workers. The union workers threaten employers
with strikes and non-cooperation if they hire non-union workers at
lower wages. Similarly, the Joama' might have demanded that
employers pay them higher wages and hire Joama’ . Employers would
agree if they feared the possibility of Joama' sanctions; if they hired
non-Joama' and paid them high wages, the Joama' might decide to
boycott that employer.
Ethnic identity and the norms about how to react to
transactions among outsiders are thus another illustration of the
analysis initiated by Basu (1986) andfollowedbyNaqviandWemhoner
(1995) into how ‘third-party’ power can influence transactions.
iii. Insiders mitigate moral hazard or ensure cooperative behavior
amongst themselves
A decade of interest in the organization of trade in the absence
of formal enforcement mechanisms has led to an clearer understanding
of how group identity can mitigate the moral hazard of non-compliance
associated with transactions that involve uncertainty regarding
contract fulfillment. For quite some time economic theorists had
understood that infinitely repeated encounters, or encounters that
continued with very low and uncertain probabilities of termination,
could allow pairs of individuals to structure their transactions in
history dependant ways and thus bring about mutual gains. But it was
another task to isolate whether there was a separate role for group
identity. Cremer (1986) was one of the first to think of identity in terms
of membership in an ongoing organization, and he showed that if
individuals are ‘born’ into these infinitely lived organizations they
would cooperate even if they as individuals had finite life spans, known
with certainty. The idea is that the overlapping generations who
inhabit the organization may have norms that call for cooperation with
cooperators and punishment, by younger generations, of older
generations who cheat.
Subsequently Bendor and Mookherjee (1990) developed the
more traditional approach of players repeating encounters over an

10. 9
infinite time horizon, and showed that there could be a role for third-
party sanctions. Implicit in their analysis was group identity, any third
party who sanctioned others for their failures to abide by the norm did
so because he or she knew that others would also do the same. That is,
the norm is shared among all players, which is the very meaning of
having an identity.
An example of where the mechanism of sanctions based on
identity is socially beneficial is provided in the work of Greif (1989,
1993) on the Jewish Maghribi traders who operated in the
Mediterranean during the eleventh century. Greif argues that the
Maghribi traders participated in a decentralized coalitionthatservedto
regulate trade relations between merchants and their agents. The
coalition was essentially a self-enforcing set of strategies about how to
deal with cheaters and embezzlers; it called for sanctioning cheaters by
refusing to having dealings with them, and even legitimized cheating
the cheaters. Greif shows that in such a coalition, member merchants
and agents will have low incentives to seek trade relations with non-
members. A non-member will not be subject to the sanctions, and so
his promises of trustworthiness will not be credible. Similarly, non-
members will not trust members of the coalition, because the latter will
not fear retribution, if they cheat, by the other Maghribi traders. The
identity of the Maghribi traders- quite distinct from other Jewish
traders in the Muslim and Christian world, apparently- was the glue
holding the coalition together, and the identity disappeared when
Genoese traders came to dominate the Mediterranean trade.
One could think of village employers' preferences for hiring
village laborers- rather than outsiders- as resulting from the same kind
of problem. Workers are unlikely to work hard if their reputations
count for nothing, the way they would in a large decentralized labor
market. To solve this problem, village employers and laborers have
implicit strategies to collectively punish wayward laborers. The
laborers then have extra incentives to work hard, and they benefit
because the employers will not want to hire outsiders.
Finally, reciprocal insurance is clearly facilitated when
members of a group share norms about mutual assistance. Al-Shahi
(1986:11) hints the importance of insurance in sustaining group
identity when he writes that, "the group remains meaningful to the

11. 10
individual in times of need, cooperation and assurance." Economists
have tried to model these transfers as the fulfillment of implicit
contracts, voluntarily negotiated in a market-type setting, where talk of
rights and duties is 'cheap' (Coate and Ravallion1993;Fafchamps1992;
Dasgupta 1992:208-217).v The claim is that the very general theory of
repeated games offers an appealing explanation of how reciprocity and
co-operation may be sustained; that is, how individual interest creates
and sustains a moral economy. As in Greif's model, the members of a
village or ethnic group may have strategies of abiding by the rules of an
implicit agreement to insure others, by helping those in need you will
be helped yourself when you are in need; if you do not help those in
need, you will be punished by the others. There are meta-sanctions
involved as well, of helping those who sanction correctly and
sanctioning those who help others when they are supposed to be
sanctioned.vi
iv. Insiders mitigate moral hazard by outsiders
Greif thought that the information problems of the
Mediterranean trade were considerable, and prevented Maghribi
traders from sanctioning anyone but themselves. It is easy to imagine
situations where groups can sanction members of other groups who
violate implicit contracts or play the wrong strategies in Prisoner's
Dilemma type situations. Kandori (1992) proves several theorems
showing how community enforcement can lead to cooperative, socially
efficient behavior.
The Sudanese case that comes readily to mind is the institution
of diya, or blood money. Ethnic groups stand ready to punish members
of other ethnic groups should they (individually or collectively) fail to
pay compensation for murder. When an individual owes diya, his
incentives to simply abandon his area and move to another region are
considerable. By holding his entire ethnic group responsible for the
payment, this moral hazard problem is mitigated, because should the
individual flee his entire tribe will be against him, in addition to the
other tribe.
v. Insiders maintain a group reputation
Unfounded group reputations that are not accompanied by
norms might be though to have little importance beyond the transitory
stage. Consider the Joama’ case described earlier. They were reputed

12. 11
to be good cotton pickers, and so earned a premium. But employers
could make profits by hiring non-Joama' at lower wages, finding out
that they worked equally hard. People would find profit in debunking
ethnic stereotypes, and thus undermine the stereotypes. The more the
stereotype was undermined, the less often other people would believe
it. Exclusion and discrimination would die out. Ethnicity would
become irrelevant in the end. O'Brien argues that in the 1980's this is
precisely what happened- Joama’ ethnicity was undermined and
became less important in the labor market. This is the common
assertion of economists when they argue against the intrusion of
identity into the marketplace.
But unfounded reputations may persist because the decisions
people make are based on their group reputations. Thus one answer to
the problem of lower wages for women is that they have a reputation
for investing less in human capital, due to their high probability of
withdrawing temporarily from the workplace to care for children, and
this reputation feeds back into the decisions women take to indeed not
invest in human capital because they are not rewarded for it.
Other kinds of group reputations may endure through time and
have large economic effects. Consider when an ethnic group hold a
norm about how a member should treat outsiders. There is a clear
benefit to having a reputation for honesty in dealings thatinvolvemoral
hazard. Kreps (1990) discussion of corporate culture is relevant here.
He argues that a corporate reputation may be understood as a general
principle- a norm- that the corporation uses to solve unforseen
contingencies. The corporation may apply the principle even when this
does not maximize profits in the short run, simply because it has
developed over time a set of interlocking strategies among the
members of the corporation to abide by the norm. Individuals outside
the group will then be willing to interact with corporate members in
ways different from their interactions with non-group members.
4. Ethnicity is fluid
In the Greif model, the action of the identity variable is all in the
beginning, when a group of traders who emigrated from Baghdad to
Tunis begin to define themselves as 'Maghribi' traders. Once they are
defined, and recognize each other, their identities are set for centuries,

13. 12
until they mysteriously expire. Several decades of researchonethnicity
and identity cast doubt on this static version of ethnicity, regardless of
whether it is consistent with the surviving historical records from
almost a thousand years ago. Political scientists and anthropologists
have been quite insistent that ethnic groups and other collective
identities change, grow and dissolve, sometimes quite rapidly, over
time.
Ethnic identity is furthermore multiple and situational. The
boundaries of ethnic groups are always overlapping. Cohen(1978:387)
expresses the idea of situationality well: people have "multiple and
overlapping sets of ascriptive loyalties that make for multiple
identities," so that ethnicity is "a series of nesting dichotomizations of
inclusiveness and exclusiveness"withinwhich"theprocessofassigning
person to a group is both subjective and objective, carried out by
themselves and others, and depends on what diacritics are used to
define membership." Abdul-Jalil (1984:75) points out that the
diacritical elements of identity encompass territoriality, occupation,
genealogy and language, and are mobilized and analyzed, by actors, in
different ways in different situations; "We do not expect identification
in a feud or diya paying for that matter to be similar to identification in
a work party or a market place." Both Abdul-Jalil and Holy ()
emphasize the tension between different identities as members of kin
groups and as villagers, and to that we might add the tension between
ethnic identity and village identity, and between personal and village
identity.
The situational nature of ethnicity is not by itself a problem for
the economic interpretation; the external mechanism for sustaining
norms is likely to be much more complex. But recognizing the
situationality of identity leads directly to the problem of an
understanding of the fluidity of identity and ethnicity that is absent
from the economic approach. A considerable body of work establishes
this fluidity of identity in Sudan and shows how the processofassigning
self-identity can be linked to economic incentives. Haaland (1969)
discusses how Baggara and Fur identities were related to their distinct
economic enterprises. Ibrahim (1988) analyzes how Ja'ali genealogies
are used to construct a quite mutable identity. Doornbos (1988)relates
some of the processes influencing the adoption of a 'Sudanese'identity.

14. 13
Muhammed Ahmad (1971) showed how the British encouraged
sedentary farmers to identify with the Rufa'a al-Hoj, by handing over
local administrative positions to members of the 'tribe'. James (1971)
attributed the adoption of Funj identities, on the part of local
inhabitants in the Ethiopian borderlands, primarily to a desire of local
elites to ally themselves with northern Sudanese merchants.
O'Brien (1986) treats this problem extensively. Recall that
Joama' laborers of eastern Kordofan were reputed to be good cotton
pickers, and so earned higher wages in the cotton and sorghum fields of
Gezira and Gedaref in eastern Sudan. Some West Africans had
assimilated Joama' Arab identity because they could enjoy the higher
returns earned by Joama'. Joama' accepted migrants into the group
because the migrants were an additional source of labor for their own
fields. The Joama' earned a rent, exploiting their labor in the villages, in
return for 'teaching' them Joama' ways.
Ethnicity seems to have been very responsive to policy in
Sudan. El Hakim (1976), in his study of the Zeyadiya in Darfur,
observed that, "the tribe's very nature as a socio-politicalsystemandits
relations with other tribes cannot be understood without reference to
the administrative policies to which it was subject..." A telling detail
from his study is how one section of the Zeyadiya migrated to Kordofan
when the Sultan of Darfur, Ali Dinar, imposed harsh taxes on the
nomads. After the conquest of Darfur, the British ordered theZeyadiya
reunited, interrupting integration into the dar Hamid tribal
confederacy. British policy was similar, initsconsciousmanipulationof
the process of ethnicity, to the Darfur sultanate's policy of consolidating
ethnicities through the granting of large land areas to notable families,
and having them be responsible for local 'rule', and defining their
'subjects'.
5. Endogenous identity
Some exciting recent work shedslightonhowtothinkaboutthe
endogeneity of identity. These theoretical models are explicitly
dynamic, in the sense that equilibrium membership in an ethnic group
may be ‘perturbed’ by shocks to the economy, and thenewmembership
that emerges from an adjustment path may be different from the
original membership. These papers are among the first to take up the

15. 14
challenge of formally approaching the research agenda called for by
Barth (1969), of exploring the dynamic boundaries of ethnicity, rather
than the core.
Tirole (1996) asks the question of why a group reputation
exists at all, why it persists over time, how it changes over time, and
why it influences individual behavior. He considers the following
situation. Suppose individuals- honest, dishonest and opportunistic-
were ‘born’ into groups (Tirole calls them firms) known to consumers
or other transactors. The value of transacting with a member of a
group depends on the reputation of the group, because the reputation
of the group determines the price that transactors are willing to pay
when making transactions. There is then a rent to be obtained from
belonging to a group with a good reputation. Tirole assumes that
honest and dishonest individuals behave mechanistically, so the only
decision-making is carried out by the opportunistic individuals. Will
they cheat or not cheat? When born into high reputation groups, Tirole
shows that there exist parameter values where they will not cheat. If
they cheat they face some probability of being caught, and the other
members of the group will expel them. (Tirole argues that the
mechanism of decision-making whereby cheaters are expelled will not
affect the problem.)
The dynamic nature of the group comes into play when
historical accidents change temporarily the incentives to cheat, and
opportunistic agents in the group do cheat. Once they have cheated,
their incentives to cheat again change, even if all the other parameters
of the model revert to their state before the shock; the idea is that once
someone has committed one crime, and not been discovered, the
incentives are to commit another, because the marginal punishment
decreases faster than the probability of being caught increases. More
people in the group cheat, then, and the groups reputation sinks. The
gradual replacement of the firm’s personnel (through attrition and
firings once cheaters are discovered) does not improve the reputation,
because the newcomers to the firm find that consumers think they are
dishonest, so they have incentives to behave dishonestly. The
reputation of the group changes over time, from high to low, and the
composition of membership changes.

16. 15
Can this stylized model shed any light on the processes of
identity change in Sudan? Consider the peasant-herder dichotomy
discussed by both Haaland and Holy: it appears that many ethnic
groups are actually more about the activity people engage in than the
identity of their parents. Men who farm become Fur, men who herd
become Baggara; men who farm become Berti, men who herd become
Zaghawa. Herders, by nature of their work, need reputations to
prosper. A herder has to make long term commitments over time and
not behave opportunistically (as he accepts or lends stock, as he
contracts for payment or privilege for watering, as he agrees to divide
pastures, as he agrees to reside in a place during the off-season, as he
vouches for the ownership of a particular animal). Herders then have
an interest in the reputation of their particular groups; in the Zaghawa
awlad-Yahya are known to be cheaters, they will suffer in the
marketplace. This gives the group an interest in ostracizing
opportunists when they are caught. Those expelled from herdinggo on
to become farmers, where reputation is much less important.
Aggregate shocks to a group may change their reputations in a way that
becomes locked in; perhaps this explains the disappearance of a
mysterious nomadic group known as the Fazzara during the Sennar
kingdom period.
Fafchamps(1996)providesanevenmoreinterestinganalysisof
dynamic group formation. He dispenses with the common assumption
that transactions always occur between randomly matched partners,
and allows agents to transact with partners over time. This new
assumption brings to the fore the problem of ‘renegotiation-proofness’
that plagues much of the literature on group identity: once someone
cheats, it may be in the interest of the individual cheated to strike a deal
with the cheater and not report the violation of the norm. The
assumption of random matching every period conveniently rules this
out. Fafchamps shows that even without this assumption, trust-based
equilibria where individuals transact and enjoythegainsfromtradeare
possible. He then goes on to develop conditions under which an
economy might evolve into a situation where partners transact
repeatedly among themselves, excluding others permanently from the
possibility of transacting; an ethnic trading elite may form

17. 16
spontaneously as a result of path-dependent accidents of random
encounters among agents.
A final recent entry point into theproblemofendogenousgroup
formation is provided by Hoff. She addresses the previously mentioned
large and growing literature on village insurance and the 'moral
economy'. The missing element in much of that literature is the
problem of how the boundaries of the group are determined. Hoff
shows that the problem of determining boundaries can be solved
formally and simply. She applies the theory of local public goods: an
equilibrium insurance group would be one that voted for a particular
level of insurance, a level of insurance in particular that led to a group
that would be willing to vote for it. in her model, then, participation in
the group is voluntary. Wealthier individuals want to vote for low
insurance, poorer individuals for high insurance. The higher the
insurance, the fewer wealthier members participate. So, as Hoff puts it,
there is a tradeoff between greater membership, which smooths the
variation of group income, and greater sharing, whichbenefitsthepoor.
But Hoff’s analysis does not go far enough; she restricts group
decision making to the level of insurance, and does not consider that
the group might decide on it’s own membership. Even in a
geographically isolated village there is always a tension between
inclusion and exclusion. As Fafchamps (1992) noted, the members of a
reciprocal insurance group would like to leave out poorer and older
members- they would like to exclude them. But because this is a
decentralized equilibrium, there is no way to coordinate on excluding
the poor. There is a kind of reverse free-rider problem- people are
uncertain about whether the poorest are included or not, and just to be
safe they'll include them. If the wealthier members of the community
held norms amongst themselves, they might exclude the poor. This is
where outside representations of ethnic and village solidarity become
important- the stronger those representations, the less likely that the
rich can or will opt out of the reciprocal insurance scheme. The
stronger those representations, the less likely that solidarity will be
undermined by the economic incentive to exclude the poor. The
'morality' of the moral economy is not in the ethics of helping those in
need, or the rights of those without, but rather the rhetoric and
discourse about who belongs, about 'deservingness'.

18. 17
6. Other aspects of identity
In surveying the possible influences of identity on resource
allocation, we should not forget an important argument about identity
that combines some of the ‘internalized’ norms idea of social
psychology with the idea that some important goods are allocated via
non-market mechanisms. The internalized norm is that personal
satisfaction depends on performance relative to a reference group.
Scheff (1990) puts it this way: “In a society in which most [social] bonds
are intact, money, power, sex and other such externals may appear to
be motives in themselves, but they also symbolize a hidden motive, the
maintenance or enhancement of one’s standing in the eyes of others.”
And Pizzono (1986:359): “It seems difficult to hold values, to be
gratified by rewards, to enjoy satisfactions, without referring to other
individuals who are able to recognize those and respond to them.”
Non-market goods may be allocated within ethnic groups, then,
according to an individual’s rank in the group.
These two ideas- that individuals rank themselves according to
a group, and that rankings matter for the allocation of goods- have
important ramifications, developed in Cole, Mailath and Postlewaite
(1992, 1995). They show that competition over rankingtoacquirenon-
marketed goods leads to distortions in incentives to produce marketed
goods. Specifically, they consider an old and cherished example in
Sudanese studies, the problem of inflation of marriage prices. Since
marriage partners are not bought, but rather allocated through
something like a matching process, where higher ranked women (say)
marry higher ranked men. If men are the primary participants in
economic activity, they may well be ranked according to their wealth or
income. If women are ranked instead according to ‘beauty’ or some
other feature, the men have incentives to over-invest in currentincome,
or in quick return activities, so they can be higher in the ranking.
The issue, for Cole et al., is that the important variables in
society become the reference groups in society within which peopleare
ranked, and the norms that those groups have for ranking people. An
interesting possibility is to consider whether the more groups there

19. 18
are, the less distortions there will be. Clearly different groups will have
different distributions of the variables that are important in
determining the final ranking, and thus offer different incentives. It
remains to be seen whether any general statement can be made about
optimal divisions in society.
7. Conclusion
The emphasis in this paper on the implications of ‘identity
economics’ should not blind us to seeing the face of identity on every
transaction. Kasfir (1976:28) noted quite a while ago that, “The
insignia of ethnicity are inescapable, but ethnic identity is not.
Everyone is born into a culture, a language, a territory, and a political
organization. Only some, however, are known by these facts of life...
Only where ethnicity seizes the political imagination does itbecomethe
basis for political participation.” The same may be said for identity
economics. Many societies may be in equilibria where ethnicity plays
very little role. Indeed, given the way ‘identity economics’ has been
formulated in this paper, as a set of equilibrium strategies that include
norms about how transactions among and between members of ethnic
groups should be structures, the presumption must be that historical
lock-in is the main reason why one economy is structured along ethnic
dimensions and another not. The rationale for policy is then greatly
strengthened, in the abstract. Policy, however, is itself always
endogenous, which brings us back to the political scientists and their
understanding of ‘identity politics’.
This paper explores these economic aspects of identity, an
'identity economics' instead of identity politics, by showing how
identity-based exclusionandsanctionmechanismsoperateineconomic
interaction.vii Sometimes these mechanisms have negative social
consequences, as when they reinforce monopoly, but sometimes they
can be socially beneficial, as when they facilitate intertemporal trade or
resolve incentive problems. In either case, they provide one
explanation, among many competingandcomplementaryexplanations,
for why identity-based solidarity, exclusion and sanctions are
sustained; in this case because it is in the economic interest of
individuals to act on the basis of identity.

20. 19
What does this all have to do with the Sudan? One might argue
that violence in the Sudan will continue as long as the polity is fractured
into ethnic groups with sub-national loyalties. These loyalties may be
maintained and fostered through economic interest. This suggests that
economic policy will be influential in undermining ethnicity. Markets
by themselves might not do the job, some positive action might need to
be taken. But positive action is always a double-edged sword, because
sometimes identity can be very useful, and in particular the poorest
members of villages face exclusion should the social bonds of solidarity
be weakened. It may be the case that this is the greater danger- the
creation of a rural lumpen proletariat that relies on no larger structures
for their survival. Elsewhere in Africa they have proved to be volatile;
one thinks of the Mai Tatsine uprising in Northern Nigeria. Some way
must be found to accomplish both objectives at once- of undermining
the group solidarity that leads to negative exclusion, but substituting
for the group solidarity that serves a useful economic role.

21. 20
Figure 1: Typology of Equilibria Afforded by Maintenance of Group Identity
Characteristic of
equilibrium
Signal/action Sanctions
applied to:
Example
Enforcing cartel Insider's offer to outsider Insider Discriminati
on
Enforcing cartel Outsider's refusal to agree to
terms of insider
Outsider Joama'
laborers
Mitigating moral hazard Insider's improper fulfillment of
contract
Insider Jellaba
traders
Mitigating moral hazard Outsider's improper fulfillment of
contract
Outsider Diya

22. 21
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26. 25
Footnotes
* I would like to thank Michael Chege, Shaun Malarney, Gabriel Fuentes
and Jeremy King for comments on a very early draft.
i.These features of identity are discussed extensively in social psychology (see the volumes by
Tajfel, 1978, 1981, 1982, and Babad, 1983).
ii.Barth (1969), based in part on his work in Darfur, defined ethnic groups as discrete systems
with distinct and delimiting values, with stable boundaries. Individuals were mobile within and
between those boundaries. The primary substance to the boundaries was a limitation on the
roles individuals could play, and on the partners they could choose for certain kinds of
transactions. For further discussion see the papers in Glazer and Moynihan (1975).
iii. We will see later that in fact identities are quite fluid, and the theory will have a hard time to
capture the endogeneity of identity.
iv.For general discussions of the effects of norms in economics see Field (1984), Plattteau
(1994a,b) and Basu (1995).
v.Most of the literature on this informal insurance has been couched in either the language of
the moral economy, or in the language of game-theoretic proofs of cooperative equilibria.
James Scott, in his book on the moral economy of Vietnamese peasants, interprets this
insurance as the result of political negotiations over rights, duties and morality. His treatment
draws on E.P. Thompson's conclusions regarding the English crowd: discourse and social
interaction determine redistributive transfers.
vi.One danger of these norms, pointed out by Platteau (1996) and Hoff (1996) is that they may
reduce the incentives for innovation and investment.
vii.Sen (1986:351) suggests another way in which identity becomes important in economic
phenomena: "...the choice of actions may be seen as a group choice and 'self-interest' in that
context may involve a correspondingly wider sense of identity. 'We' may be the natural unit of
first-person decision." For a general discussion of exclusion see Murphy (1988).