The Erosion and Sustainability of Norms and Morale

The initially high performance of a socioeconomic organization is quite often subject to gradual erosion over time. We present a simple model which captures such a phenomenon. We assume that players are partly motivated by certain psychological factors, norms and morale, and they are willing to exert extra effort if others do so. This results in a ”continuum” of equilibrium effort levels, whose minimum corresponds to the Nash equilibrium with respect to the material incentives. We show that repeated random shocks induce the erosion of equilibrium effort levels, but they do not completely decay; in the long run a certain range of efforts are sustainable. Our model shows that different organizations typically enjoy diverse norms and morale, which persist for a long time, in the vicinity of the equilibrium determined by material incentives. JEL Classification Numbers: A12, A13, C70, C72, C73, C91, C92, D63, D64, H41. ∗This is the text for the 2002 JEA-Nakahara Prize Lecture, delivered at the Fall meeting of the Japanese Economic Association at the University of Hiroshima on 13-14 October 2002. †E-mail: [email protected]. Tel: +81 3 5841 5657. Fax: +81 3 5841 5521. The author is grateful to J. Hofbauer, W. Sandholm, H. Imai, T. Kikutani, A. Okada, T. Sekiguchi, T. Shichijo, H. Suehiro, the seminar participants at the University of Kyoto, D. Shimizu and an anonymous referee for helpful comments and discussion. Financial supports from CIRJE at the University of Tokyo and the Japan Economic Research Foundation are also gratefully acknowledged.