On labor incentives and work norm in Japanese firms

Abstract

In this paper, we argue that social/corporate norms play an important role in achieving higher productivity and better economic welfare. We define “social norm” to be a standard of behavior suggested by a social custom, i.e., a customary choice of actions in each social situation. We reinterpret the well-known Nash equilibrium as a “norm equilibrium.” A norm equilibrium is a stable social norm, stable in the sense that there is no incentive to deviate from the behavior suggested by the prevailing social norm. This interpretation requires less information than the traditional interpretation. Moreover, we need not be concerned with the problem of refinement because it is the social norm itself which refines the equilibria. We apply this concept to the labor market. The key assumption is that the level of an individual worker's effort is private information known to workers as a whole; i.e., all workers' efforts are known to their fellow workers as well as to the workers themselves. We show that different work norms may emerge in different corporations at an equilibrium. In “prestigious” firms cooperation is the prevailing work norm, while in “nonprestigious” firms noncooperation is the norm. Thus, the efficiency wage hypothesis holds without the existence of unemployment. Some implications of this interpretation for the Japanese labor markets are discussed.