DP13250 Social Norms in Networks

Author(s): Philip Ushchev, Yves Zenou
Publication Date: October 2018
Date Revised: October 2018
Keyword(s): networks, Social norms, welfare
JEL(s): D85, J15, Z13
Programme Areas: Public Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=13250

Although the linear-in-means model is the workhorse model in empirical work on peer effects, its theoretical properties are understudied. In this paper, we investigate how social norms affect individual effort, aggregate effort, and welfare. While individual productivity always positively affects own effort and utility, we show that taste for conformity has an ambiguous effect on individual outcomes and depends on whether an individual is above or below her own social norm. Equilibria are usually inefficient and, to restore the first best, the planner subsidizes (taxes) agents whose neighbors make efforts above (below) the social norms in equilibrium. Thus, provision of more subsidies to more central agents is not necessarily efficient.