Optimal Contracting With Endogenous Social Norms

40 Pages Posted: 24 Dec 2007

See all articles by Paul E. Fischer

Paul E. Fischer

University of Pennsylvania - Accounting Department; University of Pennsylvania

Steven J. Huddart

Pennsylvania State University, University Park - Department of Accounting

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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 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.

Keywords: alternative utility functions, earnings management, multi-task agency, organization design, professional codes of conduct

JEL Classification: C70, D63, D70, J33, Z13

Suggested Citation

Fischer, Paul E. and Fischer, Paul E. and Huddart, Steven J., Optimal Contracting With Endogenous Social Norms. American Economic Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1077910 or http://dx.doi.org/10.2139/ssrn.528842

Paul E. Fischer (Contact Author)

University of Pennsylvania - Accounting Department ( email )

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University of Pennsylvania ( email )

United States
215 573 7533 (Phone)

Steven J. Huddart

Pennsylvania State University, University Park - Department of Accounting ( email )

University Park, PA 16802-3603
United States
814-863-0448 (Phone)

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