Optimal Contracting With Endogenous Social Norms
40 Pages Posted: 13 Apr 2004 Last revised: 2 Jan 2008
Date Written: November 2007
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: Suggested Citation