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American Economic Review: Vol. 98 No. 4 (September 2008)

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Optimal Contracting with Endogenous Social Norms

Article Citation

Fischer, Paul, and Steven Huddart. 2008. "Optimal Contracting with Endogenous Social Norms." American Economic Review, 98(4): 1459-75.

DOI: 10.1257/aer.98.4.1459

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)

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Authors

Fischer, Paul (PA State U)
Huddart, Steven (PA State U)

JEL Classifications

D23: Organizational Behavior; Transaction Costs; Property Rights
D82: Asymmetric and Private Information
D86: Economics of Contract: Theory
Z13: Economic Sociology; Economic Anthropology


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