Accounting Papers

Document Type

Journal Article

Date of this Version

9-4-2008

Publication Source

American Economic Review

Volume

98

Issue

4

Start Page

1459

Last Page

1475

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.

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Date Posted: 27 November 2017

This document has been peer reviewed.