Norms, Rationality, and Communication: A Reputation Theory of Social Norms

Abstract

Does the discovery of "law and social norms" necessitate breaking with the rational choice paradigm? In this paper, I argue for an answer in the negative. To this end, I propose a reputation theory of social norms, which differs from other proposals in two principal respects: First, it explains norms without any assumption of behavioral constraints (like habit or conscience) and normative motivations (like altruism or aspiration to esteem). Second, it does even without any assumption regarding model-exogenous, private information that most other reputation and signaling explanations use (such as the discount rate in Eric Posner's signaling model).

Instead, reputation theory analyzes norms as mere social constructs: In strategic situations, rationality fails to provide clear guidance on how to play. Because individuals must nonetheless make decisions, they follow norms. Yet norms are susceptible to strategic manipulation; they can be destabilized by promulgating different norms. Two factors make norms stable in spite of that threat: network effects and preference compatibility. These two factors favor cooperative reputation norms, i.e., norms that foster exchanges among few individuals. More excitingly, network effects and preference compatibility also support norms that overcome collective action problems. Thus, the reputation theory of social norms is an additional way of resolving one of the anomalies of rational choice analysis - the fact that collective action exists.

Keywords: social norms, law and social norms, reputation, rational choice, collective good norms

JEL Classification: Z13