The Economics of Identity and the Endogeneity of Race

Economic and social theorists have modeled race and ethnicity as a form of personal identity produced in recognition of the costliness of adopting and maintaining a specific identity. These models of racial and ethnic identity recognize that race and ethnicity is potentially endogenous because racial and ethnic identities are fluid. We look at the free African-American population in the mid-nineteenth century to investigate the costs and benefits of adopting alternative racial identities. We model the choice as an extensive-form game, where whites choose to accept or reject a separate mulatto identity and mixed race individuals then choose whether or not to adopt that mulatto identity. Adopting a mulatto identity generates pecuniary gains, but imposes psychic costs. Our empirical results imply that race is contextual and that there was a large pecuniary benefit to adopting a mixed-race identity.