Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 1997:28: Social Norms and Moral Hazard

Martin Dufwenberg () and Michael Lundholm ()
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Martin Dufwenberg: Department of Economics, Postal: Stockholm University, 106 91 Stockholm, Sweden
Michael Lundholm: Department of Economics, Postal: Stockholm University, 106 91 Stockholm, Sweden

Abstract: The probability of income loss depends on talent and effort. Effort has positive externalities and therefore individuals are proportion to their perceived diligence. The social norm requires more effort from individuals perceived as more talented, but talent is private information and individuals cunningly choose effort so as to manipulate the public perception of their talent. We analyze the workings of a social insurance system in this setting. It turns out that social norms may mitigate moral hazard. However, the distribution of social status in society will not be uniform.

Keywords: Social insurance; social norms; status; moral hazard

JEL-codes: A14; C72; D81; D82; G28; H55; I38; J65

22 pages, November 25, 1997

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