American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Optimal Contracting with Endogenous Social Norms
American Economic Review
vol. 98,
no. 4, September 2008
(pp. 1459–75)
Abstract
Research in sociology and ethics suggests that individuals adhere to social norms of behavior established by their peers. Within an agency framework, we model endogenous social norms by assuming that each agent’s cost of implementing an action depends on the social norm for that action, defined to be the average level of that action chosen by the agent’s peer group. We show how endogenous social norms alter the effectiveness of monetary incentives, determine whether it is optimal to group agents in a single or two separate organizations, and may give rise to a costly adverse selection problem when agents' sensitivities to social norms are unobservable. (JEL D23, D82, D86, Z13)Citation
Fischer, Paul, and Steven Huddart. 2008. "Optimal Contracting with Endogenous Social Norms." American Economic Review, 98 (4): 1459–75. DOI: 10.1257/aer.98.4.1459Additional Materials
JEL Classification
- D23 Organizational Behavior; Transaction Costs; Property Rights
- D82 Asymmetric and Private Information
- D86 Economics of Contract: Theory
- Z13 Economic Sociology; Economic Anthropology