This paper presents the findings of an experimental study to investigate the causal impact of social identity on individuals’ response to economic incentives. It focuses on China’s household registration (hukou) system which favors urban residents and discriminates against rural residents in resource allocation. Results indicate that making individuals’ hukou status salient and public significantly reduces the performance of rural migrant students on an incentivized cognitive task by 10 percent, which leads to a significant leftward shift of their earnings distribution. The results demonstrate the impact of institutionally imposed social identity on individuals’ intrinsic response to incentives, and consequently on widening income inequality.