New publication: The importance of considering optimal government policy when social norms matter for the private provision of public goods

In general it is argued that a government should put every effort into inducing individuals to fully contribute to the social good. For example, China is doing this with its Social Credits System. We challenge this view and study optimal government policy in a model of public good provision and social approval in a dynamic setting. We show that even if complete adherence to the social norm maximizes social welfare it is by no means necessarily optimal to push society towards it. We stress the different roles of the social externality and the public good problem. We discuss the problem with the standard crowding in and out argument and analyze the relationship with Pigouvian taxes. We discuss the role of the cost of public funds and show how it can create path dependency, multiplicity of both optimal equilibria and optimal paths, and discuss the role of parameter instability.

You can download the paper HERE.

Intuitively, we argue that simply trying to push society to adhere to a norm via some kind of incentives can have unforeseen consequences with potentially considerable costs. You have to fully know how the underlying social norm evolves, potentially even erodes, when you introduce a policy. There is the example of a kindergarten where parents were always coming late to pick up their kids. The staff then introduced a fine in order to make parents pick their kids up on time. However, the fine had exactly the opposite effect – parents started to pick up their kids much later. The reason was that the fine substituted out the social norm of picking up the kids on time. Before the fine, parents at least tried to pick up their kids on time because it was a social norm to do so. After the introduction of the fine, parents could buy this extra time, so the social norm did not matter any longer. So policies, even those that are well-meant, can be damaging to society.

Information on my co-author Guy Meunier: Guy Meunier is a Senior Research Fellow at the French Agricultural Research Institute (INRA). He works mostly on environmental economics and imperfect competition, but his interests extend far beyond that, to cultural economics and issues such as meat consumption or equity. You can find more information about him HERE.