Ethnic identity development includes the identity formation in an individual's self-categorization in, and psychological attachment to, (an) ethnic group(s). Ethnic identity is characterized as part of one's overarching self-concept and identification. It is distinct from the development of ethnic group identities. Ethnic identity development is the process by which individuals come to understand and define their sense of belonging to an ethnic group. It typically begins in adolescence and is influenced by social, cultural, and psychological factors. Researchers have created different models to explain how this identity forms and evolves over time.With some few exceptions, ethnic and racial identity development is associated positively with good psychological outcomes, psychosocial outcomes (e.g., better self-beliefs, less depressive symptoms), academic outcomes (e.g., better engagement in school), and health outcomes (e.g., less risk of risky sexual behavior or drug use).

Development of ethnic identity begins during adolescence but is described as a process of the construction of identity over time due to a combination of experience and actions of the individual and includes gaining knowledge and understanding of in-group(s), as well as a sense of belonging to (an) ethnic group(s). Given the vastly different histories of various racial groups, particularly in the United States, that ethnic and racial identity development looks very different between different groups, especially when looking at minority (e.g., Black American) compared to majority (e.g., White American) group comparisons.

Ethnic identity is sometimes interchanged with, held distinct from, or considered as overlapping with racial, cultural and even national identities. This disagreement in the distinction (or lack thereof) between these concepts may originate from the incongruity of definitions of race and ethnicity, as well as the historic conceptualization of models and research surrounding ethnic and racial identity. Research on racial identity development emerged from the experiences of African Americans during the civil rights movement, however expanded over time to include the experiences of other racial groups. The concept of racial identity is often misunderstood and can have several meanings which are derived from biological dimensions and social dimensions. Race is socially understood to be derived from an individual's physical features, such as white or black skin tone. The social construction of racial identity can be referred as a sense of group or collective identity based on one's perception that they share a common heritage with a particular racial group. Racial identity is a surface-level manifestation based on what people look like yet has deep implications in how people are treated.

Recent literature has emphasized that ethnic identity development is a dynamic and non-linear process, especially during adolescence. Rather than occurring in fixed stages, identity formation is shaped by ongoing exploration, commitment, and personal narratives, all influenced by relationships with family, peers, and broader social contexts. According to Branje et al. (2021), identity development involves both stability and change, and adolescents actively construct their sense of self in response to life events and cultural experiences. The study also highlights that stronger ethnic identity development is associated with better mental health and psychosocial functioning.

Generally, group level processes of ethnic identity have been explored by social science disciplines, including sociology and anthropology. In contrast, ethnic identity research within psychology usually focuses on the individual and interpersonal processes. Within psychology, ethnic identity is typically studied by social, developmental and cross-cultural psychologists. Models of ethnic development emerged both social and developmental psychology, with different theoretical roots.

Ethnic identity emerged in social psychology out of social identity theory. Social identity theory posits that belonging to social groups (e.g. religious groups or occupational groups) serves an important basis for one's identity. Membership in a group(s), as well as one's value and emotional significance attached to this membership, is an important part of one's self-concept. One of the earliest statements of social identity was made by Kurt Lewin, who emphasized that individuals need a firm sense of group identification in order to maintain a sense of well-being. Social identity theory emphasizes a need to maintain a positive sense of self. Therefore, in respect to ethnic identity, this underscores affirmation to and salience of ethnic group membership(s). In light of this, affirmation of ethnicity has been proposed to be more salient among groups who have faced greater discrimination, in order to maintain self-esteem. There has also been research on family influences, such as cultural values of the family. Also, specific aspects of parenting, such as their racial socialization of youth, can contribute to the socialization of adolescents.

Relatedly, collective identity is an overarching framework for different types of identity development, emphasizing the multidimensionality of group membership. Part of collective identity includes positioning oneself psychologically in a group to which one shares some characteristic(s). This positioning does not require individuals to have direct contact with all members of the group. The collective identity framework has been related to ethnic identity development, particularly in recognizing the importance of personal identification of ethnicity through categorical membership. Collective identity also includes evaluation of one's category. This affective dimension is related to the importance of commitment and attachment toward one's ethnic group(s). A behavioral component of collective identity recognizes that individuals reflect group membership through individual actions, such as language usage, in respect to ethnic identity.

Identity becomes especially salient during adolescence as recognized by Erik Erikson's stage theory of psychosocial development. An individual faces a specific developmental crisis at each stage of development. In adolescence, identity search and development are critical tasks during what is termed the ‘Identity versus Role-confusion’ stage. Achievement of this stage ultimately leads to a stable sense of self. The idea of an achieved identity includes reconciling identities imposed on oneself with one's need to assert control and seek out an identity that brings satisfaction, feelings of industry and competence. In contrast, identity confusion occurs when individuals fail to achieve a secure identity, and lack clarity about their role in life.