To What Extent Defining a Group Predicates on Defining Other Groups?

We present a framework of group cooperation and competition in which agents are concerned not only about their material payoffs but also about their psychological payoffs, derived from working with others per se. In such a framework, a group's psychological preferences serve to enhance the group's material payoffs. We show that a small group has strong incentives to engage in outward-looking identity strengthening, such as stereotyping or airing grievances against a specific, large outgroup, and a large group has strong incentives to engage in inward-looking identity strengthening, such as self-stereotyping, glorifying its own history, etc..