Does social identity matter in governance decisions? Evidence from an agrarian reform settlement in Brazil

To what extent can Social Identity (or the sense of belonging to a group) induce one of the transacting parties to sell his product by using the governance structure endorsed by the group to which he/she belongs (even if that decision contradicts the efficient alignment principle outlined by Transaction Cost Economics - TCE)? To this end, we incorporate the idea underlying the microfoundations of strategy into TCE. First, we revise the motivation driving economic behavior in vertical trading transactions by incorporating Social Identity into the utility function of one of the transacting parties. This implies that he/she would also wish to maximize his/her acceptance by the group to which he/she belongs. Second, we explore the conditions in which social identities matter most to the governance decision, as well as their respective effect on the governance choice: will the discriminating alignment hold or will other decisions prevail? Empirically, we conducted a survey together with 109 rural producers in one of the oldest agrarian reform settlements to be supported by the Social Movement MST in Brazil. We sought to see how they sold their produce (market relationships, vertical integration or cooperatives — the arrangement endorsed by MST). Our choice was motivated mainly by the identification of these producers with MST. The results indicate a positive and significant relation between Social Identity and the use of the governance mechanism encouraged by the group to which the agent belongs (in our case, MST). This effect is stronger than is that of transactional attributes when said social identities are strong. This implies that the efficient alignment might not hold when social identities are very high, because the motivations driving economic relations can be more complex than are transactional attributes alone.