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Interventions with Sticky Social Norms: A Critique

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  • Rohan Dutta
  • David K Levine
  • Salvatore Modica

Abstract

We study the consequences of policy interventions when social norms are endogenous but costly to change. In our environment, a group faces a negative externality that it partially mitigates through incentives in the form of punishments. In this setting, policy interventions can have unexpected consequences. The most striking is that when the cost of bargaining is high, introducing a Pigouvian tax can increase output—yet in doing so increase welfare. An observer who saw that an increase in a Pigouvian tax raised output might wrongly conclude that this harmed welfare and that a larger tax increase would also raise output. This counter-intuitive impact on output is demonstrated theoretically for a general model and found in case studies for public goods subsidies and cartels.

Suggested Citation

  • Rohan Dutta & David K Levine & Salvatore Modica, 2022. "Interventions with Sticky Social Norms: A Critique," Journal of the European Economic Association, European Economic Association, vol. 20(1), pages 39-78.
    • Handle: RePEc:oup:jeurec:v:20:y:2022:i:1:p:39-78.
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    File URL: http://hdl.handle.net/10.1093/jeea/jvab015
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    Cited by:

    1. Roberto Galbiati & Emeric Henry & Nicolas Jacquemet, 2024. "Learning to cooperate in the shadow of the law," Journal of the Economic Science Association, Springer;Economic Science Association, vol. 10(2), pages 165-198, December.
    2. Ushchev, Philip & Zenou, Yves, 2020. "Social norms in networks," Journal of Economic Theory, Elsevier, vol. 185(C).
    3. Rohan Dutta & David K. Levine & Salvatore Modica, 2022. "Failing to Provide Public Goods: Why the Afghan Army Did Not Fight," Review, Federal Reserve Bank of St. Louis, vol. 104(2), pages 110-119.
    4. David K Levine & Lee Ohanian, 2023. "When to Appease and When to Punish: Hitler, Putin, and Hamas," Levine's Working Paper Archive 11694000000000159, David K. Levine.
    5. David K Levine, 2022. "Phoenix From the Ashes: The Evolution of Mechanism Designers," Levine's Working Paper Archive 11694000000000141, David K. Levine.

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