A Meeting of the Minds: Contracts and Social Norms

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IZA Seminar

Place: Schaumburg-Lippe-Str. 9, 53113 Bonn

Date: 21.11.2011, 12:15 - 13:30


Presentation by 

Erin L. Krupka (University of Michigan)


In this paper we demonstrate that incomplete contracts induce specific social norms of obligation. We employ a new experimental method to measure social norms directly via an incentive-compatible mechanism that exploits a key feature of norms: they are collectively help perceptions of the appropriateness of behavior. We find that handshake agreements substantially change the social norm in three ways. First, taking the promised action becomes substantially more appropriate, and all other actions become less appropriate. Second, the handshake agreement increases the consensus across individuals about which action is the most appropriate. Third, in the Bertrand Game the handshake agreement replaces a norm of risk minimization with a norm of obligation. Our results shed new light on one mechanism by which incomplete contracts persist and can outperform complete contracts. Finally we combine choice data for these games with the social norms elicited using the incentive compatible norm elicitation technique to predict changes in behavior across conditions and games. We show that a utility model that includes social norms as an additional motivation does much better predicting behavior than models which include only monetary utility and social preferences for fairness.

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