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Social Norms and Moral Hazard

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  • Dufwenberg, Martin
  • Lundholm, Michael

Abstract

We examine the impact of social rewards in an unemployment insurance context. A social norm requires effort in proportion to perceived talent, but individuals cunningly choose effort so as to manipulate the perception of their talent. The model predicts that low talented individuals increase effort in response to more generous unemployment insurance. The welfare consequences of the social rewards are ambiguous. Social rewards boost effort, but for individuals with low talent more than any real economic concern can justify. Moreover, the distribution of social respect is slanted in favour of the more talented.

Suggested Citation

  • Dufwenberg, Martin & Lundholm, Michael, 2001. "Social Norms and Moral Hazard," Economic Journal, Royal Economic Society, vol. 111(473), pages 506-525, July.
  • Handle: RePEc:ecj:econjl:v:111:y:2001:i:473:p:506-25
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    References listed on IDEAS

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    1. Assar Lindbeck & Sten Nyberg & Jörgen W. Weibull, 1999. "Social Norms and Economic Incentives in the Welfare State," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 1-35.
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    5. Besley, Timothy & Coate, Stephen, 1992. "Understanding welfare stigma: Taxpayer resentment and statistical discrimination," Journal of Public Economics, Elsevier, vol. 48(2), pages 165-183, July.
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    8. Steven Shavell, 1979. "On Moral Hazard and Insurance," The Quarterly Journal of Economics, Oxford University Press, vol. 93(4), pages 541-562.
    9. Arnott, Richard & Stiglitz, Joseph E, 1991. "Moral Hazard and Nonmarket Institutions: Dysfunctional Crowding Out or Peer Monitoring?," American Economic Review, American Economic Association, vol. 81(1), pages 179-190, March.
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    13. repec:hhs:iuiwop:476 is not listed on IDEAS
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    More about this item

    JEL classification:

    • A14 - General Economics and Teaching - - General Economics - - - Sociology of Economics
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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