Optimal Contracting with Endogenous Social Norms

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...

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Bibliographic Details
Published inThe American economic review Vol. 98; no. 4; pp. 1459 - 1475
Main Authors Fischer, Paul, Huddart, Steven
Format Journal Article
LanguageEnglish
Published Nashville American Economic Association 01.09.2008
Subjects
Adverse selection
Contract incentives
Contracts
Cost efficiency
Cost functions
Economic costs
Economic models
Ethics
Financial incentives
Implicit costs
Incentives
Microeconomics
Minimization of cost
Monetary incentives
Organizational behavior
Peers
Performance metrics
Personality traits
Preferences
Principal-agent theory
R&D
Research & development
Research & development expenditures
Social behaviour
Social norms
Social psychology
Social relations
Sociology
Studies
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Summary: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.
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
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ISSN:0002-8282
1944-7981
DOI:10.1257/aer.98.4.1459