Laws and norms with (un)observable actions

Abstract

We analyze the interactions between social norms, the prevalence of acts, and policies when people cannot directly observe actors’ behavior and must rely on noisy proxies. Norms provide ineffective incentives when acts are committed either very frequently or very infrequently, because noisy signals of behavior are then too weak to alter people’s beliefs about others’ behavior. This cuts against the dynamics of the ‘honor-stigma’ model (Bénabou and Tirole 2006; 2011), and leads to the opposite positive and normative conclusions with even modest errors. The review process through which public signals are provided is then an additional policy variable. When the cost of financing material rewards is high, it is optimal to rely solely on ‘symbolic rewards’ coupled with review standards that maximize reputational incentives, implying stricter criteria when there are weaker social norms. When material rewards are also used, review standards are stricter than that which would maximize reputational incentives.