Jesus, Hillel and the Man of the Street. Moral and Social Norms in Heterogeneous Populations

This paper presents an idealized model of social interaction, where preferences are private information and individuals cannot condition their behavior on the identity of whom they are interacting with. An optimal decentralized benchmark rule is identified, where each individual imposes some restriction on what people interacting with him cannot do. Social norms arise in the model as a consequence of reciprocating behavior. I show that social norms can always be reversed, as long as there remains a minimal level of diversity in individual choices. Social norms turn out to be less efficient than democracy as a way to obtain homogeneity in individual behavior. However, both mechanisms are welfare-reducing w.r.t. the decentralized benchmark. Moreover, imposing a single behavior by democratic decision is more welfare-reducing the more fragmented society is (thus the larger the “threat” of invasion from a population with adverse preferences). Unfortunately, this is exactly the case when the law has a higher probability of being implemented. Finally, the democratic decision of banning a specific action is analyzed. I found that bans can be both welfare-reducing or welfare-enhancing w.r.t. the decentralized benchmark. However, they are more likely to be welfare-reducing when they hurt more people (for instance the larger the “threat” of invasion from a population with adverse preferences), but this is when they are more likely to be implemented.