Working Paper Series,
Uppsala University, Department of Economics

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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Published as

Martin Dufwenberg and Michael Lundholm, (2001), 'Social Norms and Moral Hazard', Economic Journal, vol 111, no 473, pages 506-525

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