Social norms and economic incentives in firms

This paper studies the interplay between economic incentives and social norms in firms. Our main focus is on “efficiency norms,” that is, norms that arise from workers’ desire for, or peer pressure towards, social efficiency for the workers as a group. In a simple model of team production and linear contracts we examine the possibility of multiple equilibria, and whether too strong economic incentives may knock out more efficient norm-based equilibria. We also consider partnerhips, complementarity in production, stochastic production, heterogeneity among workers, and alternative incentive schemes including relative-performance pay.