Signaling Discount Rates: Law, Norms, and Economic Methodology

Posted: 22 Jan 2001

Abstract

This paper reviews Eric Posner's book "Law and Social Norms" (2000). Posner explains norms as arising from a game in which individuals seek to attract cooperative opportunities by signaling a low discount rate. Individuals with low discount rates are more likely than those with high discount rates to cooperate in iterated prisoner dilemma situations. They are also more willing to bear immediate costs to attract future opportunities. Consequently, Posner claims that any costly behavior can attract cooperative opportunities by signaling low discount rates. All that is necessary is that a "norm entrepreneur" make nearly everyone recognize that a given behavior serves as such a signal, thus making the behavior a norm.

After explaining Posner's thesis in greater detail, I examine a few of his applications: norms concerning gift-giving, family, conspicuous consumption, and race discrimination. I then criticize the general theory on five grounds: (1) Because he offers no explanation as to why some norm entrepreneurs succeed and others fail, the theory is consistent with almost any behavioral result and appears to be impossible to falsify. Moreover, though standard economic theory can usually identify what costly behaviors are investments, the signaling model makes every costly behavior a potential investment, so that virtually any behavioral result is consistent with economic theory. (2) Posner does not consider concealed cheating. Because those with low discount rates will invest more heavily in concealing their cheating than those with high discount rates, it will not always pay to signal a low discount rate, a point which greatly complicates the signaling story. (3) The model implausibly implies that norms are weak in small, stable, and integrated communities; that the aged obey social norms less than everyone else; and that individuals never volunteer information that confirms their discounting of the future. (4) Most of the behaviors that Posner discusses are extraordinarily noisy signals of one's discount rate. Because standard reputation-building is a less noisy means of attracting cooperative partners, the model seriously overestimates the importance of signaling in a global equilibrium. (5) As a formal matter, the signaling model implausibly excludes normative motivations, though Posner relies on them in an ad hoc manner to explain particular results. The model's reductionism thus rejects strong intuitions about the importance of normative motivations without providing any compensating advantage in predictive power. Finally, I explain why one of Posner's applications, concerning gift-giving norms, avoids most of these criticisms and remains quite powerful.

Keywords: norms, signaling, discount rates, reductionism, gifts, race discrimination, conspicuous consumption

Suggested Citation

McAdams, Richard H., Signaling Discount Rates: Law, Norms, and Economic Methodology. Yale Law Journal, Vol. 110, 2001. Available at SSRN: https://ssrn.com/abstract=255460

Richard H. McAdams (Contact Author)

University of Chicago Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States
773-834-2520 (Phone)

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