DP13250 Social Norms in Networks
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.