Optimal contracting with endogenous social norms

Paul Fischer, Steven Huddart

Research output: Contribution to journalArticle

70 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)1459-1475
Number of pages17
JournalAmerican Economic Review
Volume98
Issue number4
DOIs
StatePublished - Sep 1 2008

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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