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McAdamsRasmusenPolinskyOrdeshookPosnerRamseyer UlenEllicksonSanchiricoKaplowPettitKahansignallingHetcherAbhijitBanerjeeSushilBikhchandaniHirshleifer IvoSugdenStrahilevitz subpopulationsKahnemanSlovicTverskyDawesdecisionmakerThibautBrinignormatizedKindlebergerLefflerAxelrodFremlingOstromMilhauptParetoChainstoreSeltenKrepsMilgromwuwmBikchandaniKuranRochefoucauldeconomicusBenklerTimurFershtman evolutionarilyCowenCosmidesToobyBarkowTangneyTriversSociobiologyRichersonBergstromNichomacheanTheologicaBudziszewskiWachter DauDharmapalaMassellCappelmalumprohibitumFallonKoniakWendelFischelGoldfarbsuboptimaloptimalityStrotzDarleyKwangNgFitzjames$nonmaterialisticexternalitiesKGblerStiglerinjurerBehymer T.J.PoratHardinShavellobservabilityAkerlofYellenDrahozalU.C.C.PabalkTicaretSirketiNorsolor Y.B.mercatoriaSkeelnonpricedGnutellaGnutella.NetYochaiTiroleNapster"commodificationFasTrakcarpool LiorcarpoolingcarpoolersLeandraLedermanexternality edsCoase Ñ ° Ñhttp://ssrn.com/abstract=293906%ô\  `&Times New Roman ¥Ý ƒ~Ç$ÝÔUSUS.,ÔÔ€&þ/%XXÔà  àòòÚ  Ú1Ú  ÚóóÝ  ÝÔ_Ô€We€include€Ellickson€(1992:124),€whom€we€read€as€implicitly€referring€to€normative€attitudesÐ e Ðwhen€he€describes€norms€as€a€form€of€ð ðsocial€control,ðð€where€ð ðsocial€controlðð€means€enforced€rules€ofÐ =Ø Ðð ðnormatively€appropriate€behavior.ððhttp://www.law.nyu.edu/faculty/workshop/spring2003/miller.pdf. Ñ ° ÑefghiEþÿ<<Cÿÿ mÝ ƒ~Ç$ÝÔUSUS.,ÔÔ€&þ/%XXÔà  àòòÚ  Ú2Ú  ÚóóÝ  ÝÔ_Ô€Ellickson€notes€(1992:€128)€that€ð ðthe€best,€and€always€sufficient,€evidence€that€a€rule€isÐ e Ðoperative€is€the€routine€...€administration€of€sanctions€...€upon€people€detected€breaking€the€rule.ððÐ =Ø ÐAlthough€we€agree€that€third„party€sanctions€commonly€reflect€the€existence€of€an€attitudinal€pattern€ð!ðÐ ° Ðthat€the€third€parties€believe€the€sanctioned€behavior€violates€an€obligation€or€at€least€that€theyÐ íˆ Ðdisapprove€of€it€ð!ð€game€theory€shows€that€such€an€attitudinal€pattern€is€not€strictly€necessary.€SeeÐ Å` ÐMahoney€&€Sanchirico€(2003).€Thirdòòóó€party€enforcement€can,€in€theory,€exist€merely€as€a€matter€ofÐ 8 Ðconvention. Ñ ° уLevel 1Level 2Level 3Level 4Level 5(.3½Þ$¢¢Ý ƒüœ!ÝÔUSUS.,ÔÝ  Ý(.3½Þ$££Ý ƒüœ!ÝÔUSUS.,ÔÝ  Ý($$””ò òÚ  Ú1Ú  Úó óUUUU)ÿÿ!dxdx Ñ ° ÑLevel 1Level 2Level 3Level 4Level 5http://papers.ssrn.com/sol3/papers.cfm?abstract_id=349040http://law.bepress.com/umichlwps/olin/art262G+J ÿÿ0_level1Ó ¨ý ÓÓ X ÓÓ/%4 4Œ ä <”ìDœôL¤/ÓÔ2ÔÔ3  Ôà..àÓ  ÓÓ2(Ü Ü4Œ ä <”ìDœôL¤2ÓÓ ¨ý Ó2D+J ÿÿ0_level2Ó ¨ý ÓÓ ° ÓÓ,"Œ Œ ä <”ìDœôL¤,ÓÔ2ÔÔ3  Ôà..àÓ  ÓÓ2(Ü Ü4Œ ä <”ìDœôL¤2ÓÓ ¨ý Ó2A+J ÿÿ0_level3Ó ¨ý ÓÓ  ÓÓ)ä ä <”ìDœôL¤)ÓÔ2ÔÔ3  Ôà..àÓ  ÓÓ2(Ü Ü4Œ ä <”ìDœôL¤2ÓÓ ¨ý Ó2>+J ÿÿ0_level4Ó ¨ý ÓÓ ` ÓÓ&<<”ìDœôL¤&ÓÔ2ÔÔ3  Ôà..àÓ  ÓÓ2(Ü Ü4Œ ä <”ìDœôL¤2ÓÓ ¨ý Ó2;+J ÿÿ0_level5Ó ¨ý ÓÓ ¸ ÓÓ#””ìDœôL¤#ÓÔ2ÔÔ3  Ôà..àÓ  ÓÓ2(Ü Ü4Œ ä <”ìDœôL¤2ÓÓ ¨ý Ó28+J ÿÿ0_level6Ó ¨ý ÓÓ  ÓÓ ììDœôL¤ ÓÔ2ÔÔ3  Ôà..àÓ  ÓÓ2(Ü Ü4Œ ä <”ìDœôL¤2ÓÓ ¨ý Ó25+J ÿÿ0_level7Ó ¨ý ÓÓ h ÓÓDDœôL¤ÓÔ2ÔÔ3  Ôà..àÓ  ÓÓ2(Ü Ü4Œ ä <”ìDœôL¤2ÓÓ ¨ý Ó22+J ÿÿ0_level8Ó ¨ý ÓÓ À ÓÓœœôL¤ÓÔ2ÔÔ3  Ôà..àÓ  ÓÓ2(Ü Ü4Œ ä <”ìDœôL¤2ÓÓ ¨ý Ó2/+J ÿÿ0_level9Ó ¨ý ÓÓ  ÓÓ ôôL¤ÓÔ2ÔÔ3  Ôà..àÓ  ÓÓ2(Ü Ü4Œ ä <”ìDœôL¤2ÓÓ ¨ý Ó2GJ ÿÿ0_levsl1Ó ¨ý ÓÓ X ÓÓ/%4 4Œ ä <”ìDœôL¤/ÓÔ2ÔÔ3  Ô€Ó  ÓÓ2(Ü Ü4Œ ä <”ìDœôL¤2ÓÓ ¨ý Ó2DJ ÿÿ0_levsl2Ó ¨ý ÓÓ ° ÓÓ,"Œ Œ ä <”ìDœôL¤,ÓÔ2ÔÔ3  Ô€Ó  ÓÓ2(Ü Ü4Œ ä <”ìDœôL¤2ÓÓ ¨ý Ó2AJ ÿÿ0_levsl3Ó ¨ý ÓÓ  ÓÓ)ä ä <”ìDœôL¤)ÓÔ2ÔÔ3  Ô€Ó  ÓÓ2(Ü Ü4Œ ä <”ìDœôL¤2ÓÓ ¨ý Ó2>J ÿÿ0_levsl4Ó ¨ý ÓÓ ` ÓÓ&<<”ìDœôL¤&ÓÔ2ÔÔ3  Ô€Ó  ÓÓ2(Ü Ü4Œ ä <”ìDœôL¤2ÓÓ ¨ý Ó2;J ÿÿ0_levsl5Ó ¨ý ÓÓ ¸ ÓÓ#””ìDœôL¤#ÓÔ2ÔÔ3  Ô€Ó  ÓÓ2(Ü Ü4Œ ä <”ìDœôL¤2ÓÓ ¨ý Ó28J ÿÿ0_levsl6Ó ¨ý ÓÓ  ÓÓ ììDœôL¤ ÓÔ2ÔÔ3  Ô€Ó  ÓÓ2(Ü Ü4Œ ä <”ìDœôL¤2ÓÓ ¨ý Ó25J ÿÿ0_levsl7Ó ¨ý ÓÓ h ÓÓDDœôL¤ÓÔ2ÔÔ3  Ô€Ó  ÓÓ2(Ü Ü4Œ ä <”ìDœôL¤2ÓÓ ¨ý Ó22J ÿÿ0_levsl8Ó ¨ý ÓÓ À ÓÓœœôL¤ÓÔ2ÔÔ3  Ô€Ó  ÓÓ2(Ü Ü4Œ ä <”ìDœôL¤2ÓÓ ¨ý Ó2/J ÿÿ0_levsl9Ó ¨ý ÓÓ  ÓÓ ôôL¤ÓÔ2ÔÔ3  Ô€Ó  ÓÓ2(Ü Ü4Œ ä <”ìDœôL¤2ÓÓ ¨ý Óhttp://ssrn.com/abstract_id=390763(M(2~Ç$¤¤Ý ƒüœ!ÝÔUSUS.,ÔÝ  ÝÔ€&þ/%XXÔà  àòòÚ  Ú0Ú  Úóó(#Ã$òòÚ  Ú0Ú  Úóó2GJ ÿÿ0_levnl1Ó ¨ý ÓÓ X ÓÓ/%4 4Œ ä <”ìDœôL¤/ÓÔ2ÔÔ3  ÔÓ  ÓÓ2(Ü Ü4Œ ä <”ìDœôL¤2ÓÓ ¨ý Óhttp://www.bartleby.com/130/.2DJ ÿÿ0_levnl2Ó ¨ý ÓÓ ° ÓÓ,"Œ Œ ä <”ìDœôL¤,ÓÔ2ÔÔ3  ÔÓ  ÓÓ2(Ü Ü4Œ ä <”ìDœôL¤2ÓÓ ¨ý Ó2AJ ÿÿ0_levnl3Ó ¨ý ÓÓ  ÓÓ)ä ä <”ìDœôL¤)ÓÔ2ÔÔ3  ÔÓ  ÓÓ2(Ü Ü4Œ ä <”ìDœôL¤2ÓÓ ¨ý Ó2>J ÿÿ0_levnl4Ó ¨ý ÓÓ ` ÓÓ&<<”ìDœôL¤&ÓÔ2ÔÔ3  ÔÓ  ÓÓ2(Ü Ü4Œ ä <”ìDœôL¤2ÓÓ ¨ý Ó2;J ÿÿ0_levnl5Ó ¨ý ÓÓ ¸ ÓÓ#””ìDœôL¤#ÓÔ2ÔÔ3  ÔÓ  ÓÓ2(Ü Ü4Œ ä <”ìDœôL¤2ÓÓ ¨ý Ó28J ÿÿ0_levnl6Ó ¨ý ÓÓ  ÓÓ ììDœôL¤ ÓÔ2ÔÔ3  ÔÓ  ÓÓ2(Ü Ü4Œ ä <”ìDœôL¤2ÓÓ ¨ý Ó25J ÿÿ0_levnl7Ó ¨ý ÓÓ h ÓÓDDœôL¤ÓÔ2ÔÔ3  ÔÓ  ÓÓ2(Ü Ü4Œ ä <”ìDœôL¤2ÓÓ ¨ý Ó22J ÿÿ0_levnl8Ó ¨ý ÓÓ À ÓÓœœôL¤ÓÔ2ÔÔ3  ÔÓ  ÓÓ2(Ü Ü4Œ ä <”ìDœôL¤2ÓÓ ¨ý Ó2/J ÿÿ0_levnl9Ó ¨ý ÓÓ  ÓÓ ôôL¤ÓÔ2ÔÔ3  ÔÓ  ÓÓ2(Ü Ü4Œ ä <”ìDœôL¤2ÓÓ ¨ý ÓÝ ƒüœ!ÝÔUSUS.,ÔÝ  ÝÔ_ÔÑe°ÑÔ‡Xê¨XXXÔÔ‡Šä~ˆXXê¨ÔÑ8€ê¨XdìdÈ8ÑÝ‚ÿÿÿÝÔ€Xê¨XˆŠä~ÔÔ€Xê¨XXXê¨Ôò òÔ  ÔÝ  ÝÔ& ê ÔÝ‚ÿÿÿÁÝÝ  Ý݃ÿÿÁ6ÝÔ Ý Ԍ̌ó óÔ€Šä~ˆXXê¨ÔÔ€Šä~ˆˆŠä~ÔÝ  ÝÌà  àà ` àà ¸ àà  àà h àà À àà  àà p àà È àà  àÌÌÌÌÓ  Óò òNorms€in€Law€and€Economics€ó óÐ Q ì ÐÔ'êe*Ôà @ àà @` àÌÌÌFirst€draft:€April€7,€2003Ð Oê  ÐThis€draft:€March€29,€2005Ð Oê  ЀÌÌÌÌRichard€H.€McAdams€and€Eric€B.€RasmusenÐ Oê ÐÌÌòòAbstractóóÐ Oê ÐÓ  Óà  àEveryone€realizes€the€importance€of€social€norms€as€guides€to€behavior€andÐ Oê Ðsubstitutes€for€law,€but€coming€up€with€a€paradigm€for€analyzing€norms€has€beenÐ Oê Ðsurprisingly€difficult,€as€has€systematic€empirical€study.€In€this€chapter€of€the€òòHandbookÐ Oê Ðof€Law€and€Economicsóó,€edited€by€A.€Mitchell€Polinsky€and€Steven€Shavell€andÐ Oê Ðforthcoming€in€2006,€we€survey€the€topic.Ð Oê Ѐà  àà ` àà ¸ àà  àà h àà À àÐ Oê Ѐà  àà ` àà ¸ àà  àà h àà À àÐ Oê ÐòòÔ#†Xê¨XˆŠä~j#ÔÔ‡&þ/%XXê¨ÔMcAdams:óó€Guy€Raymond€Jones€Professor,€University€of€Illinois€College€of€Law,€504€East€PennsylvaniaÐ Oê ÐAvenue,€Champaign,€Illinois€61820.€Office:€(217)€333„4385.€Fax:€(217)€244„1478.Ð '  ÐÔ4‚XÝ °ÔÝ‚#ÍOÝÔÿÔòòÝ  ÝÔ5  ÔRmcadams@law.uiuc.edu.Ô6LÔÝ‚#ÍO`ƒÝóóÔÿÔÝ  ÝÔ7Ý ` ŽÔÐ ÿ š ÐòòÌRasmusenóó:€Indiana€University€Foundation€Professor,€Department€of€Business€Economics€and€PublicÐ ¯"J ÐPolicy,€Kelley€School€of€Business,€Indiana€University,€BU€456,€1309€E.€10th€Street,€Bloomington,Ð ‡#"  ÐIndiana,€47405„1701.€Office:€(812)€855„9219.€Fax:€812„855„3354.€Ô4‚YÝ ôÔÝ‚#ÍOÝÔÿÔòòÝ  ÝÔ5  ÔErasmuse@indiana.edu,€Ô6K ÔÝ‚#ÍO_ ƒÝóóÔÿÔÝ  ÝÔ7Ý  ÔÐ _$ú! Ðhttp://www.rasmusen.org.€Ð 7%Ò " ÐÌCopies€of€this€article€can€be€found€at€http://www.rasmusen.orgÔ#†Xê¨X%&þ/O#ÔÔ‡&þ/%XXê¨ÔÔ#†&þ/%%&þ/K#ÔÔ‡&þ/%%&þ/Ô/papers/norms.wpd.€We€thank€JonathanÐ ç&‚"$ ÐBaron,€Lisa€Bernstein,€F.H.€Buckley,€Robert€Ellickson,€Timur€Kuran,€Thomas€Miceli,€Geoffrey€Miller,Ð ¿'Z#% ÐPeter€Ordeshook,€Richard€Posner,€J.€Mark€Ramseyer,€Barak€Richman,€and€Thomas€Ulen€for€theirÐ —(2$& Ðcomments,€and€Sean€Mead€for€research€assistance.€Ô#†Xê¨X%&þ/« #ÔÔ‡Šä~ˆXXê¨ÔÐ o) %' Ð̀Р G+â&) Ðò òÑ€Sz§ÑÑ€\OaÑÑ€aOa ÑÑ€jOa!Ñ1.€Introductionó óÐ e ÐÌà  àLaw€seeks€to€regulate€behavior€when€self„interest€does€not€produce€the€correctÐ cþ Ðresults€as€measured€by€efficiency€or€fairness.€If€people€behave€well€without€regulation,Ð cþ Ðlaw€is€superfluous€and€just€creates€extra€costs.€If€law€is€not€what€actually€determinesÐ cþ Ðhuman€behavior,€scholars€debating€it€are€wasting€their€timeÔ#†Xê¨XˆŠä~ #ÔÔ‡Šä~ˆXXê¨ÔÔ#†Šä~ˆˆŠä~í #ÔÔ‡Šä~ˆˆŠä~Ô.€For€this€reason,€law€mattersÐ c þ Ðprimarily€to€the€ð ðbad€manðð€of€Oliver€Wendell€Holmes,€Jr.€(1897).€The€ð ðbad€manðð€is,€inÐ c þ Ðeffect,€ð ðeconomic€man,ðð€caring€only€about€the€material€consequences€of€his€actions:Ð c þ ÐÌà8  àÔ#†Xê¨XˆŠä~á#ÔYou€can€see€very€plainly€that€a€bad€man€has€as€much€reason€as€a€good€one€forÐ c þ  Ðwishing€to€avoid€an€encounter€with€the€public€force,€and€therefore€you€can€see€theÐ Oê  Ðpractical€importance€of€the€distinction€between€morality€and€law.€A€man€whoÐ ;Ö  Ðcares€nothing€for€an€ethical€rule€which€is€believed€and€practised€by€his€neighborsÐ '  Ðis€likely€nevertheless€to€care€a€good€deal€to€avoid€being€made€to€pay€money,€andÐ ®  Ðwill€want€to€keep€out€of€jail€if€he€can.Ô‡Šä~ˆXXê¨ÔÐÿš Ð Ð  ÐÌThe€man€who€is€not€ð ðbadðð€in€this€sense,€however,€òòisóó€influenced€by€the€ethical€rule,€eitherÐ ë† Ðbecause€he€cares€directly€about€it€or€because€he€cares€about€other€people€who€do.€SinceÐ ë† Ðthe€perfect€ð ðbad€manðð€is€untypical,€we€should€revise€our€first€sentence€above€to€say€thatÐ ë† Ðlaw€becomes€relevant€only€when€neither€self„interest€òònor€social€normsóó€provide€adequateÐ ë† Ðincentives€for€behavior.Ô#†Xê¨XˆŠä~¥#ÔÔ‡Šä~ˆXXê¨ÔÔ#†Šä~ˆˆŠä~##ÔÔ‡Šä~ˆˆŠä~ÔÐ ë† ÐÌà  àSince€the€early€1990s,€considerable€scholarship€in€law€and€economics€has€turnedÐ ë† Ðits€attention€to€norms,€as€Ellickson€(1998)€details.€Numerous€articles€and€at€least€six€lawÐ ë† Ðreview€symposium€issuesÔ#†Xê¨XˆŠä~ë#ÔÔ‡Šä~ˆXXê¨ÔÔ#†Šä~ˆˆŠä~-#ÔÔ‡Šä~ˆˆŠä~Ô€Ô#†Xê¨XˆŠä~|#ÔÔ‡Šä~ˆXXê¨ÔÔ#†Šä~ˆˆŠä~¾#ÔÔ‡Šä~ˆˆŠä~Ôhave€addressed€the€power€of€social€norms€and€their€relevance€toÐ ë† Ðlaw€(see€ð ðSymposium...ðð€in€the€References€section)Ô#†Xê¨XˆŠä~#ÔÔ‡Šä~ˆXXê¨ÔÔ#†Šä~ˆˆŠä~C#ÔÔ‡Šä~ˆˆŠä~Ô.€Something€else€Holmes€said€is:€ð ðForÐ ë† Ðthe€rational€study€of€the€law€the€blackletter€man€may€be€the€man€of€the€present,€but€theÐ ë† Ðman€of€the€future€is€the€man€of€statistics€and€the€master€of€economics.ððAnd€indeed,€Ô#†Xê¨XˆŠä~#ÔÔ#†Xê¨XXXê¨S#ÔÔ‡Šä~ˆXXê¨ÔtheÐ ë† Ðsame€economic€methods€useful€for€analyzing€law€are€useful€for€analyzingÔ#†Xê¨XˆŠä~¹#ÔÔ‡Šä~ˆXXê¨Ô€norms,€aÐ ë† Ðtradition€going€back€as€far€as€Adam€Smith€(e.g.,€his€explanation€in€òòThe€Wealth€of€NationsÐ ë † Ð(óó1776,€Book€V,€Chapter€1)€of€how€religious€sects€flourish€in€the€anonymity€of€cities€toÐ ë!† Ðprovide€indicators€of€good€morals).€Economics€is€eminently€suitable€for€addressingÐ ë"† Ðquestions€of€the€various€incentives€mediated€neither€by€the€explicit€price€of€some€goodÐ ë#†  Ðnor€by€the€threats€of€government,€incentives€that€underlie€norms€such€as€guilt,€pride,Ð ë$† ! Ðesteem€and€disapproval.Ð ë%†!" ÐÌà  àWe€will€proceed€as€follows.€Section€2€addresses€the€definition€of€ð ðnormsðð€andÐ ë'†#$ Ðcontrasts€it€with€ð ðconventions.ðð€Section€3€discusses€the€sources€and€workings€ofÐ ë(†$% Ðconventions€and€norms,€paying€particular€attention€to€the€normative€incentives€of€guiltÐ ë)†%& Ðand€esteem.€Section€4€provides€a€general€overview€of€the€norms€literature€in€law€andÐ ë*†&' Ðeconomics,€separately€discussing€how€such€regularities€matter€to€the€positive€andÐ ë+†'( Ðnormative€analysis.€Section€5€reviews€applications€of€this€literature€to€particular€areas€ofÐ e Ðlawð!ð€torts,€criminal€law,€constitutional€law,€and€so€forth.€Section€6€concludes.Ð e ÐÌà  àÌò ò2.€Defining€ð ðNormsððÐ e Ðó óÌà  àEllicksonððs€seminal€work,€òòOrder€Without€Lawóó€(1992:€126)€notes€a€fundamentalÐ c þ Ðambiguity€in€the€word€òònormóó,€that€it€denotes€ð ðboth€behavior€that€òòisóó€normal,€and€behaviorÐ c þ Ðthat€people€òòshouldóó€mimic€to€avoid€being€punished.ðð€Ô‡Šä~ˆˆŠä~ÔÔ#†Xê¨XˆŠä~Z#ÔÔ‡Šä~ˆXXê¨ÔConfusion€arises€because€law€andÐ c þ Ðeconomics€scholars€use€the€term€in€both€senses.€All€contributors€to€the€literature€seem€toÐ c þ  Ðagree€that€a€norm€at€least€òòincludesóó€the€element€of€a€behavioral€regularity€in€a€group€ð!ð€whatÐ cþ  Ðis€typical€or€ð ðnormalðð€ð!ð€but€they€do€not€agree€on€whether€a€norm€also€requires€that€theÐ cþ  Ðbehavior€be€normatively€required.€ð ðNormðð€means€merely€equilibrium€behavior€inÔ#†Šä~ˆˆŠä~D!#ÔÔ#†Xê¨XˆŠä~†!#ÔÔ‡Šä~ˆXXê¨ÔÔ‡Šä~ˆˆŠä~Ô€PickerÐ cþ  Ð(1997);Ô#†Šä~ˆˆŠä~ð##ÔÔ‡Šä~ˆˆŠä~ÔÔ#†Xê¨XˆŠä~Ñ##ÔÔ‡Šä~ˆXXê¨Ô€Mahoney€&€Sanchirico€(2001,€2003);€and€E.€Posner€(2000)òòÔ#†Šä~ˆˆŠä~U$#ÔóóÔ#†Xê¨XˆŠä~—$#ÔÔ‡Šä~ˆXXê¨ÔÔ‡Šä~ˆˆŠä~Ô.€Others,€however,Ð cþ  Ðrestrict€the€term€to€the€combination€of€an€attitudinal€regularity€and€a€behavioral€regularityÔ#†Xê¨XˆŠä~:%#ÔÔ‡Šä~ˆXXê¨ÔÐ cþ  Ðð!ð€i.e.,€the€situation€where€people€believe€that€the€behavior€is€normatively€appropriate€(Ð cþ ÐCooter€1996;€Ellickson€1992Ô#†Xê¨XˆŠä~&#ÔÔ‡Šä~ˆXXê¨ÔÔ#†Šä~ˆˆŠä~Y%#ÔÔ‡Šä~ˆˆŠä~Ô;€Kaplow€&€Shavell€2001a,€2002a,€2002b;€McAdams€1997,Ð cþ Ð2001)Ô#†Xê¨XˆŠä~'#ÔÔ‡Šä~ˆXXê¨ÔÔ#†Šä~ˆˆŠä~D'#ÔÔ‡Šä~ˆˆŠä~Ô.׃_×Ý ƒ‚#ÃÝòòÚ  Ú1Ú  ÚóóÝ  Ý×  ×Ô#†Šä~ˆˆŠä~(#ÔÔ‡Šä~ˆˆŠä~ÔÔ#†Xê¨XˆŠä~Õ'#ÔÔ‡Šä~ˆXXê¨Ô€The€attendant€attitude€may€be€as€strong€as€a€perceived€moral€obligation€ð!ð€thatÐ cþ Ðmost€people€believe€that€everyone€should€conform€to€the€regularity€and€that€it€is€wrong€toÐ cþ Ðdo€otherwise€(Cooter€1996;€Kaplow€&€Shavell€2001a)€ð!ð€or€as€weak€as€a€simple€sense€ofÐ cþ Ðapproval€Ô#†Xê¨XˆŠä~ï(#ÔÔ‡Šä~ˆXXê¨ÔÔ#†Šä~ˆˆŠä~­(#ÔÔ‡Šä~ˆˆŠä~Ôor€disapproval€(McAdams€1997;€Pettit€1990).Ô#†Šä~ˆˆŠä~¾*#ÔÔ‡Šä~ˆˆŠä~ÔÔ#†Xê¨XˆŠä~|*#ÔÔ‡Šä~ˆXXê¨Ô€Normative€attitudes€not€only€add€aÐ cþ Ðdistinct€element€to€a€behavioral€regularity,€they€also€contribute€to€stability€by€creating€theÐ cþ Ðòònormative€incentivesóó€ð!ð€guilt,€esteem,€shame€ð!ð€that€we€discuss€below.׃c×Ý ƒ‚#ÃÝòòÚ  Ú2Ú  ÚóóÝ  Ý×  ×Ð cþ ÐÔ#†Šä~ˆˆŠä~++#ÔÔ#†Xê¨XˆŠä~m+#ÔÔ‡Xê¨XXXê¨ÔÔ‡Šä~ˆXXê¨ÔÌà  àHere€we€will€define€ð ðnormsðð€as€behavioral€regularities€supported€at€least€in€part€byÐ cþ Ðnormative€attitudes.€We€will€refer€to€behavioral€regularities€that€lack€such€normativeÐ cþ Ðattitudes€as€ð ðconventions.ðð€This€is€because€we€think€it€useful€to€have€one€term€ð!ðÐ cþ Ðð ðconventionðð€ð!ð€for€a€mere€equilibrium€that€plays€out€without€anyone€holding€beliefs€aboutÐ cþ Ðthe€morality€of€the€behavior,€and€another€term€ð!ð€ð ðnormðð€ð!ð€for€a€behavioral€regularityÐ c þ Ðassociated€with€a€feeling€of€obligation.€Ô#†Šä~ˆˆŠä~5-#ÔÔ‡Šä~ˆˆŠä~ÔÔ#†Xê¨XˆŠä~T-#ÔÔ‡Šä~ˆXXê¨ÔThis€usage€also€aligns€with€that€in€other€socialÐ c!þ ÐÑSz§Ñâ SâÑ8€ê¨XXdìXdì8Ñâ SâÑ  Ñsciences.€By€contrast,€if€norms€are€nothing€but€behavioral€regularities€without€supportÐ e Ðfrom€attitudes,€norms€are€not€really€a€subject€distinct€from€game€theory.€Indeed,€theÐ e Ðconcept€of€ð ðnormsðð€under€the€broad€definition€has€been€justly€criticized€by€such€scholarsÐ e Ðas€Kahan€(2001)€and€Scott€(2000)Ô#†Šä~ˆˆŠä~0#ÔÔ‡Šä~ˆˆŠä~ÔÔ#†Xê¨XˆŠä~D0#ÔÔ‡Šä~ˆXXê¨Ô€as€too€broad€to€be€useful.Ð e ÐÌà  àIn€excluding€conventions,€we€clearly€exclude€some€of€what€the€law„and„economicsÐ e  Ðliterature€has€discussed€as€ð ðnormsðð€ð!ð€for€example,€the€equilibria€that€emerge€from€theÐ e  Ðevolutionary€models€of€Picker€(1997)€and€Ô#†Šä~ˆˆŠä~¤2#ÔÔ#†Xê¨XˆŠä~æ2#ÔÔ‡Šä~ˆXXê¨ÔÔ‡Šä~ˆˆŠä~ÔMahoney€&€Sanchirico€(2001;€2003),€and€theÐ e  Ðsignalling€model€of€Eric€Posner€(2000).€Similarly,€we€exclude€what€Hetcher€(2003)€callsÐ e  Ðð ðepistemic€norms,ðð€regularities€that€arise€when€individuals€faced€with€informationÐ e  Ðscarcity€follow€the€crowd€as€in€the€cascades€of€Banerjee€(1992)€and€Bikhchandani,Ð e  ÐHirshleifer€&€Welch€(1992).Ô#†Šä~ˆˆŠä~¨4#ÔÔ#†Xê¨XˆŠä~‰4#Ô€Ô‡Šä~ˆXXê¨ÔAll€these€contributions€are€useful,€but€we€see€their€point€asÐ e  Ðexplaining€what€òòseemóó€to€be€norms,€motivated€by€feelings€of€right€and€wrong,€as€reallyÐ e  Ðbeing€something€else€ð!ð€conventions€motivated€by€simple€self„interest.Ô#†Xê¨XˆŠä~§6#ÔÔ‡Šä~ˆXXê¨ÔÐ e  ÐÌà  à€Even€using€the€narrow€definition€of€norm,€conventions€remain€relevant.€First,Ð e Ðconventions€are€invaluable€for€testing€whether€a€norm„based€explanation€is€strictlyÐ e Ðnecessary.€As€a€first€step,€ask€of€each€behavioral€regularity€whether€it€is€really€due€to€aÐ e Ðconvention.€Often€it€will€be,€and€there€is€no€need€to€employ€the€special€tools€of€thisÐ e Ðchapter.€Ô#†Xê¨XˆŠä~ó7#ÔÔ‡Šä~ˆXXê¨ÔSecond,€conventions€sometimes€explain€the€origin€of€norms.€Human€beingsÐ e Ðquickly€come€to€hold€normative€attitudes€about€an€existing€state€of€affairs,€believing€thatÐ e Ðother€people€òòshouldóó€do€what€they€are€expected€to€do,€especially€when€unexpectedÐ e Ðbehavior€causes€harm€(Sugden€[1998]).€Once€everyone€expects€motorists€to€drive€on€theÐ e Ðright€side€of€the€road,€we€come€to€believe€that€someone€who€drives€on€the€left€is€not€justÐ e Ðfoolish,€but€immoral.€What€is€at€first€merely€a€convention€becomes€a€norm.€In€such€cases,Ð e Ðan€understanding€of€what€maintains€the€end€state€requires€the€idea€of€norms,€but€the€bestÐ e Ðtools€for€understanding€norm€origin€come€from€game€theoryÔ#†Xê¨XˆŠä~:#ÔÔ‡Šä~ˆXXê¨Ô.€We€will€therefore€discussÐ e Ðconventions€in€some€detail€below.€Ð e ЀÌà  àAside€from€definitions,€there€remain€other€sources€of€confusion€that€we€hope€toÐ e! Ðavoid.€First,€although€sociologists€and€anthropologists€refer€to€ð ðlegal€norms,ðð€we€will,Ð e" Ðfollowing€the€convention€of€the€legal€literature,€discuss€norms€as€distinct€from€law.Ð e# ÐAlthough€we€comment€below€on€the€two€important€meta„law€norms€of€legal€obedienceÐ e$  Ðand€the€rule€of€law,€we€view€law€and€norms€as€distinct€incentives€for€behavior.€Second,Ð e%!! Ðsome€theorists€use€ð ðnormsðð€to€refer€only€to€decentralized€and€informally€createdÐ e&"" Ðregularities,€while€others€use€the€term€to€refer€to€rules€of€private€institutions€orÐ e'## Ðorganizations€ð!ð€rules€that€are€often€highly€centralized€and€formal.€We€consider€norms€toÐ e($$ Ðencompass€both€types€of€regularities,€though€we€recommend€the€term€ð ðorganizationalÐ e)%% Ðnormsðð€to€refer€to€centralized€norms.€Third,€scholars€such€as€Miller€(2003)€andÐ e*&& ÐStrahilevitz€(2000,€2003)Ô#†Xê¨XˆŠä~l=#ÔÔ‡Šä~ˆXXê¨Ô€refer€to€norms€that€arise€between€strangers€in€large€populations,Ð e+'' ÐwhereasÔ#†Xê¨XˆŠä~cB#ÔÔ‡Šä~ˆXXê¨ÔÔ‡Šä~ˆˆŠä~Ô€others,€such€as€Bernstein€(1992)€and€Ellickson€(1992Ô#†Šä~ˆˆŠä~"C#ÔÔ‡Šä~ˆˆŠä~ÔÔ#†Xê¨XˆŠä~C#ÔÔ‡Šä~ˆXXê¨Ô),€discuss€the€norms€ofÐ e Ðsmall€and€close„knitÔ#†Xê¨XˆŠä~ÛC#ÔÔ‡Šä~ˆXXê¨ÔÔ#†Šä~ˆˆŠä~™C#ÔÔ‡Šä~ˆˆŠä~Ô€subpopulations.€Norms€in€the€sense€we€study€here€arise€in€bothÐ e Ðsettings,€though€we€will€use€the€term€ð ðgroup€normðð€to€refer€to€norms€limited€to€aÐ e Ðparticular€group.€Finally,€some€theorists€implicitly€reserve€the€term€ð ðnormsðð€to€refer€onlyÐ e Ðto€general€regularities,€such€as€the€norms€of€reciprocity€or€individualism,€while€others€useÐ e Ðthe€term€for€specific€regularities€,€such€as€giving€gifts€on€Secretaryððs€Day€or€shutting€offÐ e  Ðcell€phones€in€church.€Norms€under€our€definition€encompass€regularities€at€all€levels€ofÐ e  Ðgenerality.Ð e  ÐÌà  àIt€isò ò€ó óalso€important€to€distinguish€norms€from€the€rules€of€thumb€and€psychologicalÐ e  Ðheuristics€studied€by€behavioral€economics.€Books€such€as€Kahneman,€Slovic€&Ð i  ÐTverskyððs€1982€òòJudgment€Under€Uncertainty:€Heuristics€and€Biasesóó€and€Dawesððs€1988Ð i  ÐòòRational€Choice€in€an€Uncertain€Worldóó€document€and€discuss€many€cognitive€biases€andÐ i  Ðcompensating€heuristics,€but€it€is€quite€possible€for€a€decisionmaker€to€be€perfectlyÐ i  Ðrational€yet€driven€by€norms,€or€radically€irrational€yet€indifferent€to€norms.€If€mostÐ i Ðindividuals€in€a€social€group€eat€spinach€ice€cream,€a€conventional€economist€might€restÐ i Ðcontent€with€the€explanation€that€they€like€the€flavor,€while€a€behavioral€economist€mightÐ i Ðattribute€that€odd€behavior€to€a€bias€or€heuristic.€A€norms€scholar€,€in€contrast,€would€lookÐ i Ðfor€whether€there€was€a€desire€to€conform€to€what€others€expect€and€approve€and€wouldÐ i Ðcheck€to€see€if€people€in€the€group€believed€eating€spinach€ice€cream€was€morallyÐ i Ðobligatory.€Heuristics€and€rules€of€thumb€do€have€important€implications€for€laws€andÐ i Ðlawmaking€(see,€e.g.,€Baron€(2001)),€and€they€have€been€called€norms€(e.g.,€EpsteinÐ i Ð[2001]),€but€they€really€are€a€different€subject.€Psychology€does,€however,€haveÐ i Ðapplication€in€the€experimental€study€of€what€people€mean€by€such€things€as€ð ðfairness,ðð€asÐ i Ðmay€be€seen€in€Thibaut€and€Walkerððs€1975€òòProcedural€Justice:€A€Psychological€AnalysisóóÐ i Ðand€the€literature€that€followed€it€(e.g.,€the€criticism€in€Hayden€&€Anderson€(1979)€andÐ i ÐRabin€(1993)).€Much€may€be€discovered€by€experiments€such€as€those€of€Cox€&€DeckÐ i Ð(2004)€that€do€not€investigate€only€whether€people€behave€as€the€simplest€economicÐ i Ðmodels€of€rational€and€selfish€decisionmaking€predict,€but€also€carefully€distinguishÐ i  Ðbetween€different€possible€motives€for€deviating€from€the€simple€model.€Ð i! Ðà  àÌÌò ò3.€How€Norms€Workó óÐ i$  ÐÌà  àIn€this€section,€we€will€first€discuss€what€we€mean€by€normative€incentives,€andÐ g&"" Ðthen€contrast€that€with€the€numerous€ways€in€which€conventions€can€imitate,€generate,€orÐ g'## Ðsustain€norms.Ð g($$ ÐÌò òa.€Types€of€Normative€Incentivesó óÐ g*&& ÐÐ e+'' Ðà  à€People€feel€obligations€in€a€variety€of€ways,€some€internal€and€some€external.Ð e ÐNormative€incentives€are€frequently€negative€ð!ð€costs€imposed€on€those€who€fail€toÐ e Ðconform€to€a€behavioral€regularity€(such€as€guilt€from€not€protecting€a€child€fromÐ e Ðdrowning)€ð!ð€but€can€also€be€positive€ð!ð€benefits€conferred€on€those€who€exceed€theÐ e Ðnormative€requirement€(as€a€person€who€incurs€great€danger€saving€a€strangerððs€life).€AÐ e Ðsignificant€literature€documents€and€discusses€negative€sanctions,€usually€imposed€byÐ e  Ðthird€parties€but€sometimes€by€the€victim€of€a€norm€violation.€Examples€include€gossipÐ e  Ð(Ellickson€1992:214„15;€McAdams€1996);€admonishment€and€insult€(Miller€2003;Ð e  ÐBuckley€2003);€social€ostracism€and€shunning€(E.€Posner€1996a);€economic€boycott€andÐ e  Ðexclusion€(Bernstein€1992,€1996,€1999,€2001;€Skeel€2001);€property€destructionÐ e  Ð(Ellickson€1992:€215„19;€Miller€2003:€931);€and€violence€(McAdams€1995;€Ô#†Šä~ˆˆŠä~ŸD#ÔMilhaupt€&Ð e  ÐWest€2000:€68Ô#†Xê¨XˆŠä~]D#ÔÔ‡Šä~ˆXXê¨ÔÔ‡Šä~ˆˆŠä~Ô).€Positive€sanctions€have€received€less€attention,€but€see€Ellicksonððs€(1991:Ð e  Ð236„39)€discussion€of€rewards€for€third€party€norm€enforcers.Ô#†Xê¨XˆŠä~›V#ÔÔ‡Šä~ˆXXê¨ÔÔ#†Šä~ˆˆŠä~ºV#ÔÔ‡Šä~ˆˆŠä~ÔÐ e  ÐÔ#†Šä~ˆˆŠä~áW#ÔÔ‡Šä~ˆˆŠä~ÔÔ#†Xê¨XˆŠä~ŸW#ÔÔ‡Šä~ˆXXê¨ÔÌà  àWhether€they€are€positive€or€negative,€by€ð ðnormative€incentives,ðð€we€do€not€meanÐ e Ðmerely€these€external€sanctions,€which€are€the€proximate€but€not€ultimate€influence€onÐ e Ðbehavior.€Instead,€we€must€ask€why€third€parties€ever€bother€to€incur€the€costs€ofÐ e Ðsanctioning€norm€violators.€Often€it€is€possible€to€explain€the€third€party€behavior€as€itselfÐ e Ðpart€of€a€convention,€not€dependent€on€normative€beliefsð!ð€see€Mahoney€&€SanchiricoÐ e Ð(2003)€or€Hirshleifer€&€Rasmusen€(1989).€Underlying€a€norm€in€the€strict€sense€of€theÐ e Ðword,€however,€is€a€non„material€motivation,€either€for€the€primary€behavior€of€the€personÐ e Ðwho€follows€the€norm€or€for€the€secondary€behavior€of€the€people€who€reward€hisÐ e Ðconformity€or€punish€his€violation.Ð e ÐÌà  àThe€place€to€look€for€norms€as€opposed€to€conventions,€therefore,€is€in€the€utilityÐ e Ðfunction.€Normative€attitudes€are€beliefs€about€the€appropriateness€of€behavior,€and€theÐ e Ðstarting€point€for€analysis€is€how€these€beliefs€influence€utility.€Ô#†Šä~ˆˆŠä~8X#ÔÔ‡Šä~ˆˆŠä~ÔÔ#†Xê¨XˆŠä~zX#ÔÔ‡Šä~ˆXXê¨ÔConsider€threeÐ e Ðpossibilities.Ð e ÐÌòò(i)€Guilt€and€pride.€óóAn€internalized€normative€incentive€means€that€an€individualÐ e! Ðsanctions€himself.€Guilt€is€disutility€that€arises€when€a€person€behaves€in€ways€he€thinksÐ e" Ðmorally€wrong.€The€converse,€pride,€is€utility€that€arises€when€he€behaves€in€ways€heÐ e# Ðthinks€virtuous.€That€someone€can€feel€guilt€and€pride€is€equivalent€to€saying€that€he€has€aÐ e$  Ðtaste€for€behaving€in€conformity€with€his€moral€beliefs.€Moral€philosophers€have€for€aÐ e%!! Ðconsiderable€time€emphasized€the€role€of€guilt€and€pride€in€moral€behavior,€as€in€HumeÐ e&"" Ð(1751:150).€These€incentives€do€not€require€that€anyone€else€know€how€the€person€acted.Ð e'## ÐNor€do€they€preclude€the€individual€from€acting€contrary€to€his€moral€beliefs€ð!ð€sometimesÐ e($$ Ðthe€payoffs€for€doing€so€are€greater€than€the€anticipated€guilt€costs.€As€elsewhere€inÐ e)%% Ðeconomics,€in€this€style€of€analysis€the€individual€calculates€what€maximizes€his€utilityÐ e*&& Ðand€acts€accordingly.€As€elsewhere,€the€empirical€prediction€is€that€when€prices€change,Ð e+'' Ðso€will€behavior:€if€the€material€benefit€of€norm€violation€rises€while€the€guilt€penaltyÐ e Ðstays€constant,€we€will€observe€more€violation.€Ð e ÐÌà  à€As€with€other€tastes€in€the€utility€function,€if€a€personððs€taste€for€pride€and€distasteÐ e Ðfor€guilt€varies€widely€from€day€to€day,€the€rational„actor€approach€will€not€yield€usefulÐ e Ðpredictions.€By€the€end€of€childhood,€however,€the€moral€beliefs€that€underlie€guilt€andÐ e  Ðpride€are€fixed€enough€to€be€difficult€to€change.€Some€ò òó ópsychologists€claim€that€there€is€aÐ e  Ðgenetic€basis€for€guilt.€This€idea€has€been€picked€up€in€law„and„economics€by€RubinÐ e  Ð(1982),€Richard€Posner€(1986)€and€Kaplow€&€Shavellððs€òòFairness€and€Welfareóó€(2002)Ð e  Ðbecause€evolutionary€theory€can€explain€moral€tastes€in€the€same€way€that€it€explains€theÐ e  Ðtaste€for€leisure€or€sweets.€Part€of€the€evolutionary€explanation€is€the€insight€that€potentialÐ e  Ðfeelings€of€guilt€can€be€useful€as€a€means€of€self„control,€especially€if€this€potential€isÐ e  Ðvisible€to€others.€Ô#†Xê¨XˆŠä~À]#ÔÔ‡Šä~ˆXXê¨Ôò òÐ e  Ðó óÌòòÔ#†Xê¨XˆŠä~µg#ÔÔ‡Šä~ˆXXê¨Ô(ii)€Esteem€and€disapproval.óó€Esteem€is€a€normative€incentive€that€exists€if€a€person€caresÐ e Ðintrinsically€(in€addition€to€instrumentally)€what€others€believe€about€his€behavior.Ð e ÐSomeone€might€gain€utility€directly€from€believing€that€others€esteem€him€and€lose€utilityÐ e Ðfrom€believing€that€others€disapprove€of€him,€regardless€of€whether€these€outsiders€takeÐ e Ðactions€that€materially€affect€him.€This€effect€of€othersðð€beliefs€on€oneððs€utility€isÐ e Ðequivalent€to€saying€that€a€person€has€a€taste€for€othersðð€esteem.€The€idea€is€older€thanÐ e ÐAdam€Smith,€but€he€put€it€well€when€he€said€in€òòThe€Theory€of€Moral€Sentimentsóó€that€Ð e ÐÌà8  àNature,€when€she€formed€man€for€society,€endowed€him€with€an€originalÐ e Ðdesire€to€please,€and€an€original€aversion€to€offend€his€brethren.€She€taughtÐ e Ðhim€to€feel€pleasure€in€their€favourable,€and€pain€in€their€unfavourableÐ e Ðregard.€She€rendered€their€approbation€most€flattering€and€most€agreeable€toÐ e Ðhim€for€its€own€sake;€and€their€disapprobation€most€mortifying€and€mostÐ e Ðoffensive.€(Smith,€1790:€116).Ô#†Xê¨XˆŠä~h#ÔÔ‡Šä~ˆXXê¨ÔÐeÐ Ð  ÐÌÔ#†Xê¨XˆŠä~am#ÔÔ‡Šä~ˆXXê¨Ôà  àUnlike€utility€from€pride€or€guilt,€utility€from€esteem€or€disapproval€arises€onlyÐ e! Ðwhen€one€believes€other€people€have€formed€beliefs€about€oneððs€behavior.€DisapprovalÐ e" Ðcan€therefore€be€avoided€by€misbehaving€secretly.€As€with€guilt,€the€benefits€of€actingÐ e# Ðcontrary€to€what€others€approve€may€outweigh€the€expected€disapproval,€especially€whenÐ e$  Ðthe€disapproval€is€contingent€on€the€offending€behavior€being€detected.€On€the€otherÐ e%!! Ðhand,€proper€behavior€is€no€guarantee€of€esteem,€because€esteem€depends€on€oneððsÐ e&"" Ðperception€of€other€peopleððs€beliefs,€not€on€oneððs€own€behavior.€Not€just€good€conduct,Ð e'## Ðbut€otherððs€knowing€about€it€ð!ð€and€knowing€that€they€know€about€it€ð!ð€is€necessary€forÐ e($$ Ðesteem.€And€one€may€gain€esteem€without€good€behavior€by€fooling€others€into€thinkingÐ e)%% Ðone€has€behaved€well.€Ð e*&& ÐÐ e+'' Ðà  àEsteem€and€disapproval€differ€too€from€òòpraiseóó€and€òòcensureóó,€which€are€merely€theÐ e Ðòòexpressionóó€of€esteem€and€disapproval.€Esteem€and€approval€are€subjective,€based€onÐ e Ðbeliefs€about€othersðð€opinions€rather€than€on€the€actual€opinions€or€their€publicÐ e Ðdeclaration.€Praise€and€censure€are€evidence€of€what€others€believe€ð!ð€but€expression€is€notÐ e Ðnecessary€for€an€individual€to€believe€that€others€have€formed€judgments€of€esteem€orÐ e Ðdisapproval.€The€fact€that€actual€expression€is€not€required€reduces€the€transaction€costsÐ e  Ðof€esteem€as€an€incentive€ð!ð€though€it€also€can€lead€to€misincentives€because€ofÐ e  Ðmisperceptions.€See€Kuran€(1995).€Note,€too,€that€praise€and€censure€might€also€be€valuedÐ e  Ðfor€their€own€sake;€one€may€value€the€expression€even€if€it€is€already€common€knowledgeÐ e  Ðthat€the€speaker€holds€the€expressed€view,€or€even€if€it€is€common€knowledge€that€theÐ e  Ðspeaker€is€being€hypocritical.€€The€sweetest€congratulation€might€be€from€a€disappointedÐ e  Ðrival.€Ô#†Xê¨XˆŠä~Ãm#ÔÔ‡Šä~ˆXXê¨ÔÔ#†Šä~ˆˆŠä~~]#ÔÔ‡Šä~ˆˆŠä~ÔÐ e  Ðà  àà ` àà ¸ àà  àà h àà À àà  àà p àà È àà  àÌÔ#†Xê¨XˆŠä~Øv#ÔÔ‡Šä~ˆXXê¨Ôà  àBrennan€&€Pettit€(2004:€chapter€1)€have€traced€the€history€of€the€idea€of€esteem,Ð e  Ðand€Fershtman€&€Weiss€(1998)€identify€conditions€under€which€a€preference€for€esteemÐ e Ð(or€what€they€call€ð ðstatusðð)€is€evolutionarily€stable.€Various€theorists,€including€PettitÐ e Ð(1990),€McAdams€(1997),€Brennan€&€Pettit€(2000),€Cowen€(2002),€and€Brennan€&€PettitÐ e Ð(2004)€Ô#†Xê¨XˆŠä~êw#ÔÔ‡Šä~ˆXXê¨Ôuse€esteem€as€the€key€explanation€of€norms.€Ô#†Xê¨XˆŠä~ëy#ÔÔ‡Šä~ˆXXê¨ÔÔ#†Šä~ˆˆŠä~w#ÔÔ‡Šä~ˆˆŠä~ÔÐ e ÐÌòò(iii)€Shame.óó€There€is€a€third€possibility.€Some€scholars,€e.g.€R.€Posner€&€RasmusenÐ e Ð(1997),Ô#†Šä~ˆˆŠä~›z#ÔÔ‡Šä~ˆˆŠä~ÔÔ#†Xê¨XˆŠä~Yz#ÔÔ‡Šä~ˆXXê¨Ô€distinguish€shame€from€guilt.Ô#†Šä~ˆˆŠä~h{#ÔÔ‡Šä~ˆˆŠä~ÔÔ#†Xê¨XˆŠä~ª{#ÔÔ‡Šä~ˆXXê¨Ô€Often,€shame€is€used€to€mean€the€what€we€haveÐ e Ðtermed€disapproval,€though€with€an€emphasis€on€particularly€intense€and€widespreadÐ e Ðdisapproval.Ô#†Šä~ˆˆŠä~ |#ÔÔ‡Šä~ˆˆŠä~ÔÔ#†Xê¨XˆŠä~L|#ÔÔ‡Šä~ˆXXê¨Ô€Shame€might,€however,€mean€something€else:€a€negative€emotion€that€arisesÐ e Ðfrom€believing€one€has€failed€to€meet€standards€set€by€the€normative€beliefs€of€others.€OnÐ e Ðthis€account,€shame€falls€between€guilt€and€disapproval.€Like€guilt,€it€is€an€internalizedÐ e Ðsanction€that€occurs€even€if€no€one€observes€a€norm€being€broken.€Unlike€guilt,€theÐ e Ðperson€feeling€shame€has€failed€to€live€up€to€the€normative€beliefs€of€others,€which€mayÐ e Ðbe€the€case€even€if€he€has€lived€up€to€his€own€principles.€As€with€disapproval,€theÐ e Ðstandards€of€behavior€are€external,€but€unlike€disapproval,€the€shamed€person€suffersÐ e  Ðdisutility€regardless€of€what€others€think.€Suppose€someone€privately€engages€in€sexualÐ e! Ðbehavior€òòXóó€without€feeling€guilt€(because€he€has€not€violatedòòóó€his€own€moral€principles)€orÐ e" Ðdisesteem€(because€nobody€else€knows€he€has€done€itòòóó).€Later€he€discovers€that€a€friendÐ e# Ðstrongly€disapproves€of€òòXóó.€The€loss€of€utility€that€occurs€only€at€this€discovery€wouldÐ e$  Ðclearly€not€be€guilt€ð!ð€by€his€own€principles,€he€has€done€nothing€wrong€ð!ð€nor€disapprovalÐ e%!! Ðð!ð€since€the€friend€does€not€know€that€he€has€done€òòXóó.€We€need€a€new€category:€shame.Ð e&"" ÐLikewise,€there€is€a€positive€incentive€analogous€to€pride€or€esteem€if€someone€gainsÐ e'## Ðutility€from€successfully€living€up€to€the€standards€set€by€the€normative€beliefs€of€others,Ð e($$ Ðregardless€of€where€whether€he€holds€those€same€normative€beliefs€or€whether€othersÐ e)%% Ðknow€he€has€succeeded€(Cf.€McAdams€1997:382„86).€Shame€and€guilt€are,€of€courseÐ e*&& Ðsubjects€long€studied€in€psychology.€For€entry€into€the€literature,€see€Cosmides,€Tooby€&Ð e+'' ÐBarkow€(1992),€Harder€(1995),€and€Tangney€(1995).Ð e ÐÔ#†Xê¨XˆŠä~†}#ÔÔ#†Xê¨XXXê¨D}#ÔÔ‡Šä~ˆXXê¨ÔÔ‡Šä~ˆˆŠä~ÔÌÔ#†Xê¨XˆŠä~Ù…#ÔÔ#†Xê¨XXXê¨ø…#ÔÔ‡Šä~ˆXXê¨Ôò òÔ‡Šä~ˆˆŠä~Ôb.€Conventions€à ¸ àà  àà h àà À àà  àà p àÐ e Ðó óÔ#†Šä~ˆˆŠä~€†#ÔÌò òÔ‡Šä~ˆˆŠä~Ôó óà  àAs€noted€above,€many€behavioral€regularities€that€seem€normative€may€in€part€orÐ cþ Ðwhole€be€motivated€by€non„moral€concerns,€even€when€not€driven€by€common€tastes€orÐ c þ Ðfear€of€government€penalties.€These€are€conventions.€Scholars€in€law€and€economics€wereÐ c þ Ðanalyzing€social€behavior€driven€by€what€we€call€conventions€well€before€the€wordÐ c þ Ðð ðnormsðð€became€popular,€e.g.,€Brinig€(1990)€on€wedding€rings€and€Schwartz,€Baxter€&Ð c þ ÐRyan€(1984)€on€dueling.€AÔ#†Šä~ˆˆŠä~5‡#ÔÔ‡Šä~ˆˆŠä~Ô€number€of€simple€ideas€from€game€theory€can€explainÐ c þ  Ðseemingly€normatized€behavior€as€driven€by€the€usual€incentives€studied€by€economist,Ð cþ  Ðwith€no€need€to€appeal€to€tastes.€Ð cþ  ÐÌà  àOne€of€the€most€important€settings€for€conventions€is€the€coordination€game,€inÐ cþ  Ðwhich€the€payoffs€of€the€players€are€highest€if€they€coordinate€with€each€other.€TheÐ cþ  Ðproblem€is€not€conflicting€desires€but€the€need€to€avoid€a€discoordination€that€hurtsÐ cþ Ðeveryone.€This€game€leads€the€establishment€of€standards,€whose€importance€is€explainedÐ cþ Ðin€Kindleberger€(1983).€A€simple€example€is€driving€on€the€right€side€of€the€road.Ð cþ ÐÌà  àConventions€also€are€important€in€repeated€games,€in€particular€when€reputationsÐ cþ Ðcan€arise.€Klein€&€Lefflerððs€seminal€1981€article€on€reputation€essentially€models€it€as€anÐ cþ Ðequilibrium€of€a€repeated€game€in€which€a€player€is€willing€to€forgo€present€profits€inÐ cþ Ðexchange€for€a€good€reputation€that€will€yield€him€future€profits.€It€may€look€as€if€a€sellerÐ cþ Ðis€providing€high€quality€out€of€pride€of€workmanship€or€fear€of€disapproval,€but€he€isÐ cþ Ðactually€motivated€purely€by€material€gain.€Hirshleifer€&€Rasmusen€(1989)€use€the€idea€ofÐ cþ Ðrepeated€games€to€explain€ostracism€ð!ð€the€expulsion€of€rule„breakers€from€groups,€andÐ cþ ÐAxelrod€&€Hamilton€(1981)€show€the€power€of€reciprocal€altruism€in€ð ðtit„for„tat.ððà Ð àÐ cþ Ðà  àà ` àà ¸ àà  àà h àà À àà  àà p àà È àÌà  àSignalling€equilibria€create€still€another€form€of€convention.€Someone€may€take€aÐ c þ Ðcostly€action€to€signal€his€inclinations€or€ability.€This€occurs€if€someone€with€baserÐ c!þ Ðinclinations€or€lower€abilities€would€not€be€willing€to€bear€the€cost€of€the€signal,€whetherÐ c"þ Ðit€be€the€provision€of€advertising€or€restraint€in€taking€advantage€of€the€uninformed,€aÐ c#þ Ðrequirement€known€as€the€ð ðsingle„crossing€policyðð€because€it€can€be€formalized€asÐ c$þ  Ðrequiring€that€the€indifference€curves€in€money„signal€space€of€different€types€of€agentsÐ c%þ ! Ðcross€only€once€(see€Rasmusen,€2001,€Chapter€12).€For€example,€E.€Posner€(2000b;€2002)Ð c&þ!" Ðhas€explained€a€wide€variety€of€behaviors€as€signals€of€oneððs€discount€rate,€which€isÐ c'þ"# Ðimportant€to€revealing€oneððs€suitability€as€a€partner€in€repeated€games€(though€seeÐ c(þ#$ ÐMcAdams€(2001)€for€a€critique),€and€Fremling€&€Posner€(1999)€apply€signalling€modelsÐ c)þ$% Ðto€sexual€harassment€law.€Often,€however,€it€is€hard€to€tell€which€convention€is€at€work€ð!ðÐ c*þ%& Ðsignalling€information€or€reciprocating€in€a€repeated€game€ð!ð€as€Kahan€(2002)€observes.€Ô#†Šä~ˆˆŠä~ª‰#ÔÔ#†Xê¨XˆŠä~^†#ÔÔ‡Šä~ˆXXê¨ÔÐ c+þ&' ЇÔ‡Šä~ˆˆŠä~Ôà  àSometimes€conventions€are€formalized€in€the€shape€of€institutions,€asÐ e Ðdemonstrated€by€Ostrom€(1990,€1991)€in€general,€Cooter€(1991)€in€the€land€system€inÐ e ÐNew€Guinea,€and€Milhaupt€&€West€(2000)€in€organized€crime.€Institutions€are€rule„Ð e Ðsetting€bodies€that€unlike€government€lack€the€power€to€coerce€through€the€use€of€legalÐ e Ðforce€but€that€can€use€conventions€ð!ð€involving€ostracism,€reputation,€or€informationÐ e Ðtransmission€ð!ð€to€enforce€their€rules.Ð e  ÐÔ#†Šä~ˆˆŠä~A–#ÔÔ#†Xê¨XˆŠä~ –#ÔÔ‡Šä~ˆXXê¨ÔÌà  àSince€these€convention€models€so€often€obviate€the€need€to€use€norms€to€explainÐ e  Ðbehavior,€we€will€lay€them€out€in€slightly€greater€detail€before€proceeding€to€analysis€ofÐ e  Ðnorms€proper.€Ð e  ÐÌòòCoordination€Games.€óóIn€a€coordination€game,€two€or€more€players€makes€choices€thatÐ e  Ðwill€help€them€both€if€they€match.€Two€drivers,€Row€and€Column,€may€each€need€toÐ e  Ðdecide€whether€to€drive€on€the€right€side€of€the€road€or€the€left€as€they€approach€eachÐ e  Ðother.€The€most€important€thing€for€each€is€that€they€make€the€same€choice€(which€willÐ e Ðmean€that€they€avoid€hitting€each€other).€Assume€it€is€also€better€if€both€choose€to€driveÐ e Ðon€the€right,€since€they€are€driving€cars€with€steering€wheels€on€the€left€side.€Table€1Ð e Ðshows€the€payoffs.€Ð e ÐÌò òà  àà ` àà ¸ àà  àTable€1:€Ranked€Coordination€ó óÐ e ÐÌ€à  àà ` àà ¸ àà  àà h àà À àà  àò ò€€Columnó ó€Ð cþ Ðà0  àà0` (#(#àà ¸ àà  à€à0h` (#` (#à€Drive€on€Right€à0ph(#h(#àà0Èp(#p(#àà0 È(#È(#à€Drive€on€Left€Ðg (# (# Ѐà0  àà0` (#(#àDrive€on€Rightà0h` (#` (#àà0Àh(#h(#àò ò7,€7€à0À(#À(#àà0p(#(#àà0Èp(#p(#àà0 È(#È(#àà0x (# (#à€ó ó0,€0€Ðgx(#x(# Ðò òRowó ó€à  àà ` àà ¸ àà  àÐ k Ѐà0  àà0` (#(#àDrive€on€Leftà0h` (#` (#àà0Àh(#h(#à€0,€0€à0À(#À(#àà0p(#(#àà0Èp(#p(#àò òà0 È(#È(#à€à0x (# (#à6,€6€ó óÐo x(#x(# ÐÌPayoffs€to:€(Row,€Column)€Ð s ÐÌà  àThis€game€has€two€Nash€equilibria€if€the€choices€are€made€simultaneously€ð!ðÐ s! Ðòò(Right,€Rightóó)€and€(òòLeft,€Leftóó).€These€equilibria€can€be€Pareto€ranked,€but€each€is€anÐ s" Ðequilibria.€If€each€expects€the€other€to€drive€on€theòò€Leftóó,€that€is€a€set€of€self„fulfillingÐ s# Ðexpectations€in€a€simultaneous„move€game.€If€the€game€were€sequential,€the€onlyÐ s$  Ðequilibrium€would€be€for€Row€to€choose€òòRightóó€and€for€Column€to€follow€a€strategy€ofÐ s%!! Ðimitating€Row.€Ð s&"" ÐÌà  àMany€behavioral€regularities€are€coordination€games.€Such€behavioral€regularitiesÐ s($$ Ðare€often€called€norms,€but€not€in€our€terminology€because€they€are€driven€by€simple€self„Ð s)%% Ðinterest€rather€than€normative€beliefs.€Normative€rules€are€not€necessary€to€persuadeÐ s*&& Ðpeople€to€avoid€self„destruction€in€car€crashes.€Ð s+'' ЇòòThe€Repeated€Prisonerððs€Dilemmaóó.€A€second€major€category€of€convention€model€is€theÐ e Ðrepeated€prisonerððs€dilemma.€Unlike€coordination€games,€prisonerððs€dilemmas€haveÐ e Ðcomplete€conflict€between€the€objectives€of€the€players.€In€the€classic€story,€twoÐ e Ðprisoners,€Row€and€Column,€are€being€questioned€separately.€If€both€confess,€each€isÐ e Ðsentenced€to€eight€years€in€prison.€If€both€deny€their€involvement,€each€is€sentenced€toÐ e Ðone€year.€If€just€one€confesses,€he€is€released€but€the€other€prisoner€is€sentenced€to€tenÐ e  Ðyears,€as€shown€in€Table€2.€Ð e  ÐÌà  àà ` àà ¸ à€ò òTable€2:€The€Prisoner's€Dilemmaó ó€Ð e  Ðà  àà ` àÌà  àà ` àà ¸ àà  àà h àà À àà  àò ò€Columnó ó€à È àÐ i  Ðà0  àà0` (#(#àà ¸ àà  àà h à€Deny€à0` (#` (#àà0p(#(#àà0Èp(#p(#àà0 È(#È(#à€Confess€Ðm  (# (# Ѐà0  àà0` (#(#àDeny€à0¸ ` (#` (#àà0¸ (#¸ (#àà0h(#(#à-1,-1€à0Àh(#h(#àà0À(#À(#àà0p(#(#àà0Èp(#p(#àà0 È(#È(#à€-10,€0€Ðm  (# (# Ðò òRowó ó€à  àà ` àà ¸ àÐ m  Ѐà0  àà0` (#(#à€Confess€à0` (#` (#àà0h(#(#à€0,-10€à0h(#h(#àà0p(#(#àà0Èp(#p(#àà0 È(#È(#àò ò€-€8,-8€ó óÐq  (# (# ÐÌPayoffs€to:€(Row,€Column)€Ð u Ѐà  àà ` àà ¸ àà  àà h àà À àà  àà p àÐ u Ðà  à€The€equilibrium€of€Table€2's€game€is€(òòConfess,€Confessóó),€with€equilibrium€payoffsÐ u Ðof€(-8,-8),€worse€for€both€players€than€(-1,-1).€Sixteen,€in€fact,€is€the€greatest€possibleÐ u Ðcombined€total€of€years€in€prison.Ð u ÐÌà  àSo€far,€no€useful€convention€has€emerged.€But€what€if€the€game€is€repeated?Ð u ÐWould€the€players€arrive€at€a€convention€of€choosing€òòDenyóó€in€the€early€repetitions,Ð u Ðknowing€that€they€will€be€in€the€same€situation€in€the€future,€with€the€possibility€ofÐ u Ðrevenge?€Not€if€this€is€all€there€is€to€the€game.€Using€an€argument€known€as€theÐ u ÐChainstore€Paradox€after€its€application€to€store€pricing€(where€the€òòDeny/Confesóós€actionsÐ u Ðbecomeòò€Price„High/Undercut„Priceóó),€Selten€(1965)€explains€that€in€the€last€repetition,€theÐ u Ðplayers€will€choose€òòDenyóó€because€future€revenge€will€be€impossible,€so€in€the€second„to„Ð u  Ðlast€repetition€the€players€will€not€have€any€hope€for€future€cooperation,€so€in€the€third„to„Ð u! Ðlast€they€will€have€no€hope,€and€so€on€to€the€first€repetition.€Ð u" ÐÌà  àIf€the€game€is€infinitely€repeated,€the€Chainstore€Paradox€does€not€apply,€and€thereÐ u$  Ðexists€an€equilibrium€in€which€the€players€chooseòò€Deny€óóeach€time.€Real„world€interactionsÐ u%!! Ðdo€not€last€forever,€but€Kreps,€Milgrom,€Roberts€&€Wilson€(1982)€show€€that€withÐ u&"" Ðincomplete€information,€the€addition€of€a€small€possibility€of€emotional€behavior€by€aÐ u'## Ðplayer€such€that€he€will€choose€òòDenyóó€until€the€other€player€chooses€òòConfess,óó€can€makeÐ u($$ Ðòò(Denyóó,€òòDenyóó)€an€equilibrium€until€near€the€last€repetition.€This€is€true€even€if€the€gameÐ u)%% Ðdoes€have€a€definite€end,€because€if€the€other€player€does€not€know€whether€his€opponentÐ u*&& Ðis€emotional€in€this€way€or€not,€his€best€strategy€turns€out€to€be€to€treat€him€gently€untilÐ u+'' Ðlate€in€the€game.€The€infinitely€repeated€game€with€complete€information€is€often€used€asÐ e Ða€simpler€model€that€comes€to€conclusions€similar€to€those€of€the€more€realistic€but€moreÐ e Ðcomplicated€finitely€repeated€game€with€incomplete€information.€Ð e Ðà  àà ` àà ¸ àÌòòSignalling.€óóThe€last€type€of€convention€model€that€we€will€describe€here€is€the€signallingÐ e Ðgame€ð!ð€one€which€is€especially€prominent€in€the€norms€literature€because€it€is€a€centralÐ e  Ðidea€in€Eric€Posnerððs€work,€including€in€his€2000€òòLaw€and€Social€Normsóó.€We€will€use€aÐ e  Ðparticular€example€from€€€Rasmusen€&€R.€Posner€Ô#†Xê¨XˆŠä~ð˜#ÔÔ‡Šä~ˆXXê¨Ô(1999),€a€model€of€employers€preferringÐ e  Ðmarried€to€single€workers.€Suppose€that€90€percent€of€workers€are€"steady,"€withÐ e  Ðproductivityòò€p=xóó,€and€10€percent€are€"wild,"€with€productivity€òòp=x-yóó.€Each€workerÐ e  Ðdecides€whether€to€marry€or€not.€Marriage€creates€utilityòò€u€=€móó€for€a€steady€worker€andÐ e  Ðutility€òòu€=€-zóó€for€a€wild€worker.€Employers,€observing€whether€workers€are€married€butÐ e  Ðnot€whether€they€are€wild,€offer€wages€òòwòòmóó€óóor€òòwòòuóóóó€in€competition€with€other€employers,Ð e  Ðdepending€on€whether€a€worker€is€married€or€not.€We€observe€that€òòwòòmóó>€wòòuóóÔ#†Xê¨XˆŠä~F·#ÔÔ‡Šä~ˆXXê¨Ô.óó€Ð e  ÐÌà  àWe€do€not€need€norms€to€explain€the€higher€wage€for€married€workers.€EmployersÐ e Ðhave€incentive€to€use€marital€status€as€a€signal€of€productivity€and€to€discriminate€againstÐ e Ðsingle€workers€even€if€nobody€thinks€that€marriage€per€se€makes€someone€better€or€worse.Ð e ÐThe€employer€has€no€intrinsic€reason€to€care€whether€the€worker€is€married€or€not,€sinceÐ e Ðwild€workers€are€less€productive€whether€they€are€married€or€not.€The€only€significance€ofÐ e Ðmarriage€for€the€employer€is€its€informational€value€as€a€signal€of€steadiness.Ð e ÐÌà  àUnlike€many€signalling€models,€here€there€is€only€a€single€equilibrium.€If€òòzóó€is€largeÐ e Ðenough€(greater€than€òòyóó),€the€employer€will€pay€wages€of€òòwòòuóó=x-yóó€and€òòwòòmóó=xóó,€the€steadyÐ e Ðworker€will€get€married,€and€the€wild€worker€will€stay€single.€Steady€workers€will€marryÐ e Ðregardless€of€the€effect€on€their€wage,€and€wild€workers€will€stay€single€even€though€theyÐ e Ðknow€that€if€they€married€an€employer€could€be€fooled€into€believing€them€to€be€steady€ð!ðÐ e Ðan€example€of€the€ð ðsingle„crossing€propertyðð€mentioned€above.€Ð e ÐÌà  àThe€employers€in€this€example€might€be€unthinkingly€obeying€a€rule€of€thumb€ofÐ e! Ðpaying€married€workers€more.€Businessmen,€like€private€individuals,€follow€manyÐ e" Ðbehavior€rules€without€inquiring€into€their€rationality.€Following€the€rule€is€efficient€andÐ e# Ðprofit„maximizing€even€if€no€businessman€understands€its€origin€or€rationale.€WhenÐ e$  Ðasked,€an€employer€might€say€he€pays€married€workers€more€because€they€deserve€theÐ e%!! Ðhigher€wage,€or€need€the€higher€wage,€even€though€that€is€not€the€true€reason.€Thus,€theÐ e&"" Ðconvention€of€signalling€is€easily€confused€with€a€norm.€Ð e'## ÐÌà  àSignalling€has€implications€for€how€laws€should€be€designed.€In€this€model,Ð e)%% Ðsubsidizing€marriage€not€only€would€be€useless€for€raising€productivity,€but€would€lowerÐ e*&& Ðit€by€depriving€employers€of€useful€information€about€the€marginal€product€of€theirÐ e+'' Ðworkers.€Similar€loss€of€information€would€occur€if€government€forbade€employers€to€useÐ e Ðan€applicant's€marital€status€in€making€a€hiring€decision.€Thus,€in€this€model,€it€would€beÐ e Ðwrong€for€the€government€to€start€with€the€true€premise€that€married€workers€are€moreÐ e Ðproductive€and€arrive€at€the€conclusion€that€if€more€workers€were€married,€productivityÐ e Ðwould€rise;€but€it€would€also€be€wrong€for€the€government€to€start€with€the€equally€trueÐ e Ðpremise€that€a€workerððs€getting€married€has€no€effect€on€his€productivityÔ#†Xê¨XˆŠä~Uº#ÔÔ‡Šä~ˆXXê¨Ô€and€arrive€at€theÐ e  Ðconclusion€that€it€would€make€no€economic€difference€if€firms€were€forbidden€Ô#†Xê¨XˆŠä~bÆ#ÔÔ‡Šä~ˆXXê¨ÔtoÐ e  Ðdiscriminate€by€marital€status.€Ð e  ÐÌà  àSignalling€models€must€be€treated€with€care.€They€are€ð ðall„purposeðð€models€thatÐ e  Ðcan€ð ðexplainðð€practically€any€pattern€of€observed€behavior€give€the€right€assumptions.Ð e  ÐThe€model€above,€for€example,€could€as€easily€have€been€made€a€model€in€which€steadyÐ e  Ðworkers€derive€òòlessóó€direct€utility€from€marriage,€in€which€case€òòsinglenessóó€would€be€theÐ e  Ðsignal€of€ability,€not€marriage.€This€flexibility€is€both€a€strength€and€a€weakness€ofÐ e  Ðsignalling€models.€Ô#†Xê¨XˆŠä~Ç#ÔÔ‡Šä~ˆXXê¨ÔÐ e ÐÌòòBayesian€Learning€in€Cascade€and€Bandit€Models.óó€Ô‡Šä~ˆˆŠä~ÔWhat€seems€to€be€norm„basedÐ e Ðbehavior€can€also€be€entirely€non„strategic,€so€neither€norms€nor€conventions€are€neededÐ e Ðto€explain€group€behavior.€One€example€is€Rasmusen€(1996),€which€explains€stigmaÐ e Ðagainst€the€employment€of€criminals€as€arising€from€employer€calculations€of€averageÐ e Ðability€based€on€population€averages€that€can€ð ðtipðð€the€level€of€criminality€even€if€noÐ e Ðsingle€worker€or€employer€thinks€his€own€behavior€will€affect€which€equilibrium€isÐ e Ðplayed€out.Ô#†Šä~ˆˆŠä~XÊ#Ô€Another€is€the€single€decisionmaker€ð ðTwo„Armed€Banditðð€model€ofÐ e ÐRothschild€(1974),€which€shows€how€seemingly€irrational,€mistaken€behavior€can€arise€asÐ e Ðthe€result€of€a€rational€policy€of€first€investigating€various€possible€behavior€rules€andÐ e Ðthen€settling€down€to€what€seems€best€and€never€again€experimenting.€Ð e ЀÔ‡Šä~ˆˆŠä~ÔÔ#†Xê¨XˆŠä~íÉ#ÔÔ‡Šä~ˆXXê¨ÔÐ e Ðà  àA€model€of€this€type€which€has€attracted€considerable€attention€is€the€theory€ofÐ e Ðcascades,€originating€with€Banerjee€(1992)€and€Bikhchandani,€Hirshleifer€&€WelchÐ e  Ð(1992)€and€summarized€in€Hirshleifer€(1995).€It€shows€how€fashions€and€fads€may€beÐ e! Ðexplained€as€simple€Bayesian€updating€under€incomplete€information,€without€anyÐ e" Ðstrategic€behavior.€Ô#†Šä~ˆˆŠä~zÎ#ÔÔ#†Xê¨XˆŠä~¼Î#ÔÔ‡Šä~ˆXXê¨ÔConsider€a€simplified€version€of€the€first€example€of€a€cascade€inÐ e# ÐBikchandani,€Hirshleifer€&€Welch€(1993).€A€sequence€of€people€must€decide€whether€toòòÐ e$  ÐAdoptóó€at€cost€.5€or€òòRejecóót€a€project€worth€either€0€or€1€with€equal€prior€probabilities,Ð e%!! Ðhaving€observed€the€decisions€of€people€ahead€of€them€in€the€sequence€plus€a€privateÐ e&"" Ðsignal.€Each€personððs€private€signal€is€independent.€A€personððs€signal€takes€the€valueÐ e'## ÐòòHighóó€with€probability€òòp>.5óó€if€the€projectððs€value€is€1€and€with€probability€(òò1„póó)€if€theÐ e($$ Ðprojectððs€value€is€0,€and€otherwise€takes€the€value€òòLowóó.€Ð e)%% ÐÌà  àThe€first€person€will€simply€follow€his€signal,€choosing€òòAdoptóó€if€the€signal€is€òòHighóóÐ e+'' Ðand€òòReject€óóif€it€is€òòLowóó.€The€second€person€uses€the€information€of€the€first€personððsÐ e Ðdecision€plus€his€own€signal.€One€Nash€equilibrium€is€for€the€second€person€to€alwaysÐ e Ðimitate€the€first€person.€It€is€easy€to€see€that€he€should€imitate€the€first€person€if€the€firstÐ e Ðperson€chose€òòAdopt€óóand€the€second€signal€is€òòHighóó.€What€if€the€first€person€chose€òòAdoptóóÐ e Ðand€the€second€signal€isòò€Lowóó?€Then€the€second€person€can€deduce€that€the€first€signal€wasÐ e ÐòòHighóó,€and€choosing€on€the€basis€of€a€prior€of€.5€and€two€contradictory€signals€of€equalÐ e  Ðaccuracy,€he€is€indifferent€ð!ð€and€so€will€not€deviate€from€an€equilibrium€in€which€hisÐ e  Ðassigned€strategy€is€to€imitate€the€first€person€when€indifferent.€The€third€person,€havingÐ e  Ðseen€the€first€two€choose€òòAdopóót,€will€also€deduce€that€the€first€personððs€signal€was€òòHighóó.Ð e  ÐHe€will€ignore€the€second€personððs€decision,€knowing€that€in€equilibrium€that€person€justÐ e  Ðimitates,€but€he,€too€will€imitate.€Thus,€the€first€personððs€decision€has€started€a€cascade,Ð e  Ðand€even€if€the€sequence€of€signals€is€(òòHigh,€Low,€Low,€Low,€Lowóó...),€everyone€willÐ e  Ðchoose€òòAdoptóó.€A€ð ðcascadeðð€has€begun,€in€which€players€later€in€the€sequence€ð!ð€startingÐ e  Ðwith€the€second€one€in€this€example!€ð!ð€ignore€their€own€information€and€rely€on€previousÐ e  Ðplayers€completely.€We€have€chosen€an€extreme€example,€in€which€the€cascade€startsÐ e Ðimmediately€with€probability€one,€but€the€intuition€is€robust,€and€more€complicatedÐ e Ðmodels€yield€interesting€implications€for€how€signal€quality€and€correlation€affect€theÐ e Ðprobability€of€a€cascade€starting.Ô#†Xê¨XˆŠä~ëÐ#ÔÔ‡Šä~ˆXXê¨ÔÐ e ÐÌà  àLearning€models€such€a€these€are€useful€for€modeling€apparently€irrationalÐ e Ðbehavioral€regularities.€Suppose€we€observe€a€culture€that€tries€to€cure€malaria€byÐ e Ðbleeding€the€patient.€This€does€not€have€to€be€the€result€of€norms.€Rather,€it€may€be€thatÐ e Ðafter€trying€other€methods€and€failingð!ð€perhaps€even€trying€quinine€bark€withoutÐ e Ðconsistent€success€ð!ð€the€tribe€has€rationally€if€mistakenly€settled€down€to€bleeding€as€theÐ e Ðbest€method€based€upon€available€evidence.€But€this€is€neither€a€norm€in€our€sense€nor€aÐ e Ðconvention,€since€it€is€the€result€of€neither€obligations€nor€strategic€interactions.€Ð e ÐÔ#†Xê¨XˆŠä~LÜ#ÔÔ‡Šä~ˆXXê¨ÔÔ‡Šä~ˆˆŠä~Ôà  àÌà  àConventions€interact€with€normatized€incentives.€Kreps,€Milgrom,€Roberts€&Ð e ÐWilson€(1982)€show€how€just€a€few€people€with€normatized€incentives€can€lead€manyÐ e  Ðothers€to€imitate€them€in€their€behavior.€Kuranððs€1995€òòPrivate€Truths,€Public€Lies:€TheÐ e! ÐSocial€Consequences€of€Preference€Falsificationóó€shows€how€such€deception€about€oneððsÐ e" Ðtrue€preferences€can€lead€to€sudden€reversals€of€public€opinion.Ô#†Šä~ˆˆŠä~¸ß#ÔÔ‡Šä~ˆˆŠä~ÔÔ#†Xê¨XˆŠä~™ß#ÔÔ‡Šä~ˆXXê¨Ô€One€of€Kuranððs€examplesÐ e# Ðis€the€collapse€of€communist€regimes€when€most€citizens€suddenly€discovered€that€theÐ e$  Ðsupport€for€the€regime€was€not€genuine€but€based€on€a€complex€ð ðweb€of€lies.ððÔ#†Šä~ˆˆŠä~ùá#ÔÔ#†Xê¨XˆŠä~;â#ÔÔ‡Šä~ˆXXê¨ÔÔ‡Šä~ˆˆŠä~Ô€Similarly,Ð e%!! ÐKuran€&€Sunstein€(1999)€propose€that€informational€and€reputational€cascades€sometimesÐ e&"" Ðcombine€to€cause€stampedes€toward€ill€considered€regulations,€and€Kuran€(1998)€analyzesÐ e'## Ðthe€interaction€between€cascades€and€norms€in€the€context€of€ethnic€identification.€Ô#†Xê¨XˆŠä~‹ã#ÔÔ‡Šä~ˆXXê¨ÔÔ#†Šä~ˆˆŠä~ªã#ÔKuranÐ e($$ Ðand€Sunstein€distinguish€Ô‡Šä~ˆˆŠä~Ôð ðinformationalðð€cascades€of€the€sort€just€described€andÐ e)%% Ðð ðreputationalðð€cascades€that€occur€only€because€individuals€expect€to€gain€by€beingÐ e*&& Ðknown€to€conform.Ô#†Šä~ˆˆŠä~¬å#ÔÔ#†Xê¨XˆŠä~7å#ÔÔ‡Šä~ˆXXê¨Ô€In€our€terminology,€informational€conformity€is€one€way€to€produce€aÐ e+'' ÐÑaOaÑâ aâѰ°Ñâ aâÑ  Ñconvention;€reputational€conformity€is€one€way€to€produce€a€norm.Ô‡Šä~ˆˆŠä~ÔÔ#†Xê¨XˆŠä~âæ#ÔÔ‡Šä~ˆXXê¨ÔÐ e ÐÌà  àThus,€after€discussing€such€diverse€convention€models€as€signalling,€repeatedÐ e Ðprisonerððs€dilemmas,€and€cascades,€we€see€that€much€of€human€behavior€that€seems€to€beÐ e Ðdriven€by€moral€beliefs€is€actually€driven€by€utility€maximization€in€the€narrow€sense€ofÐ e ÐHolmesððs€bad€man,€though€by€a€bad€man€sophisticated€enough€to€know€how€importantÐ e  Ðstrategic€behavior€is€to€his€success.€La€Rochefoucauld€said,€Ô#†Xê¨XˆŠä~#è#ÔÔ‡Šä~ˆXXê¨ÔÔ#†Šä~ˆˆŠä~áç#ÔÔ‡Šä~ˆˆŠä~Ôð ðHypocrisy€is€the€homageÐ e  Ðvice€pays€to€virtue.ðð€In€the€present€context,€ð ðConvention€is€the€homage€òòhomo€economicusóóÐ e  Ðpays€to€norms.ððòòóóÐ e  Ðà  àà ` àà ¸ àÌÌÔ#†Šä~ˆˆŠä~¬ê#ÔÔ#†Xê¨XˆŠä~jê#Ôò òÔ‡Šä~ˆXXê¨ÔÔ‡Šä~ˆˆŠä~Ôc.Ô#†Šä~ˆˆŠä~.ì#ÔÔ#†Xê¨XˆŠä~ì#ÔÔ‡Xê¨XXXê¨ÔÔ‡Šä~ˆXXê¨Ô€The€Origin€of€Normsó óÐ e  ÐÌà  àAlthough€we€have€shown€how€a€variety€of€apparent€norms€could€actually€beÐ cþ  Ðconventions,€the€study€of€conventions€is€important€to€norms€more€than€just€for€explainingÐ cþ  Ðthem€away.€While€we€have€distinguished€between€conventions€that€work€by€appealing€toÐ cþ Ðstandard,€non„normative€tastes€and€norms€that€work€only€when€supported€by€feelings€ofÐ cþ Ðobligation,€there€remains€the€question€of€where€those€feelings€come€from.€ConventionsÐ cþ Ðare€an€important€part€of€the€answer.€Ð cþ ÐÌà  àHÔ#†Xê¨XˆŠä~´ì#ÔÔ‡Šä~ˆXXê¨Ôow€people€come€to€have€any€of€the€three€normative€drives€just€discussed€ð!ð€guilt,Ð cþ Ðesteem,€or€shame€ð!ð€is€a€subject€given€considerable€attention€by€biologists€ever€sinceÐ cþ ÐDarwinððsòò€óó1874òòDescent€of€ManóóÔ#†Xê¨XˆŠä~ï#ÔÔ‡Šä~ˆXXê¨ÔÔ#†Šä~ˆˆŠä~•ì#ÔÔ‡Šä~ˆˆŠä~Ô.€For€the€biologist,€any€kind€of€tastes,€standard,€or€norm€isÐ cþ Ðthe€result€of€an€equilibrium,€an€evolved€outcome€of€a€process€similar€to€maximization,Ð cþ Ðalthough€less€calculated€and€with€results€harder€to€call€ð ðoptimalðð€in€a€meaningful€way.Ð cþ ÐBiologists€have€also€studied€wÔ#†Xê¨XˆŠä~Àð#ÔÔ‡Šä~ˆXXê¨ÔÔ#†Šä~ˆˆŠä~ñ#ÔÔ‡Šä~ˆˆŠä~Ôhat€would€be€conventions€in€humans€(because€motivated€byÐ cþ Ðcalculation)€but€are€commonly€norms€in€animals€(because€motivated€by€preferences€ð!ð€theÐ cþ Ðinborn€preferences€we€call€instinct).Ô#†Xê¨XˆŠä~‘ò#ÔÔ‡Šä~ˆXXê¨ÔÔ#†Šä~ˆˆŠä~Óò#ÔÔ‡Šä~ˆˆŠä~Ô€Though€genes€are€ð ðselfish,ðð€E.€Wilson€(1980)€showsÐ cþ Ðthat€there€are€conditions€under€which€helping€behavior€is€necessary€to€survive€ð!ð€e.g.,Ð c þ Ðhunting€large€prey,€warding€off€predators,€etc.€ð!ð€and€motives€such€as€guilt,€shame,€orÐ c!þ Ðesteem€may€induce€such€helping€behavior.€SeeÔ#†Xê¨XˆŠä~õó#ÔÔ‡Šä~ˆXXê¨ÔÔ#†Šä~ˆˆŠä~7ô#ÔÔ‡Šä~ˆˆŠä~Ô€Trivers€(1971);€Jack€Hirshleifer€(1978,Ð c"þ Ð1987);Ô#†Šä~ˆˆŠä~ö#ÔÔ‡Šä~ˆˆŠä~Ô€Fershtman€and€Weiss€(1998).€Ô#†Šä~ˆˆŠä~–ö#ÔÔ‡Šä~ˆˆŠä~ÔÔ#†Xê¨XˆŠä~Ïõ#ÔÔ‡Šä~ˆXXê¨ÔThe€approach€has€been€picked€up€in€ethics€(PeterÐ c#þ ÐSingerððs€1980€òòThe€Expanding€Circle:€Ethics€and€Sociobiologyóó),€anthropology€(Boyd€&Ð c$þ  ÐRichersonððs€1988€òòCulture€and€the€Evolutionary€Processóó,€which€applies€evolution€to€theÐ c%þ ! Ðð ðfunctionalismðð€of,€e.g.,€Marvin€Harrisððs€1974€òòCows,€Pigs,€Wars€and€Witches:€TheÐ c&þ!" ÐRiddles€of€Cultureóó),€political€science€(Ostrom€(1991)€and€her€1990€òòGoverning€theÐ c'þ"# ÐCommonsóó),€and€economics€(Jack€Hirshleifer€(1978),€Bergstrom€(2002)€and€SartoriusÐ c(þ#$ Ð(2002)€generally;€Cameron€(2001)€on€sexual€behavior).€Ð c)þ$% ÐÌà  àThe€biological€approach€is€really€an€extension€of€the€idea€that€humans€are€bornÐ c+þ&' ÐÑ\OaÑâ \âѰ°Ñâ \âÑ  Ñwith€certain€norms€instilled€in€them€(e.g.€òòRomansóó€1,€Aristotleððs€òòNichomachean€Ethicsóó,Ð e ÐAquinasððsòò€Summa€Theologicaóó),€an€idea€that€under€the€name€of€ð ðnatural€lawðð€is€the€subjectÐ e Ðof€a€quite€different€branch€of€scholarship€(e.g.,€James€Q.€Wilsonððs€òòThe€Moral€SenseÐ e Ðóó(1993)òò;óóÔ#†Xê¨XˆŠä~7÷#ÔÔ‡Šä~ˆXXê¨ÔÔ#†Šä~ˆˆŠä~õö#ÔÔ‡Šä~ˆˆŠä~Ô€Budziszewskiððs€òòWritten€on€the€Heart:€The€Case€for€Natural€Lawóó€(1997);òò€óótheÐ e Ðessays€in€George€(1995)òòóó).€The€biological€approach,€however,€with€its€analytic€frameworkÐ e Ðof€evolution€as€a€source€of€utility€functions,€has€proven€more€useful€than€natural€law€as€aÐ e  Ðsource€of€explanations€in€law€and€economics.Ô#†Xê¨XˆŠä~Yü#ÔÔ‡Šä~ˆXXê¨ÔÔ#†Šä~ˆˆŠä~›ü#ÔÔ‡Šä~ˆˆŠä~ÔÐ e  ÐÌÔ#†Šä~ˆˆŠä~›þ#ÔÔ‡Šä~ˆˆŠä~ÔÔ#†Xê¨XˆŠä~Yþ#ÔÔ‡Šä~ˆXXê¨Ôà  àBiological€evolution€brings€to€mind€the€literature€in€law€and€economics€on€theÐ e  Ðevolution€of€the€common€law,€for€which€Rubin€(1977)€and€Priest€(1977)€provide€seminalÐ e  Ðarticles€and€€Zywicki€(2003)€summarizes€and€gives€historical€detail.Ô#†Xê¨XˆŠä~5ÿ#ÔÔ‡Šä~ˆXXê¨ÔÔ#†Šä~ˆˆŠä~óþ#ÔÔ‡Šä~ˆˆŠä~Ô€The€common€law€is€aÐ e  Ðspecial€example€of€customary€law,€and€in€primitive€societies,€even€more€than€modernÐ e  Ðones,€it€can€be€difficult€to€distinguish€between€norms€and€laws€ð!ð€between€what€isÐ e  Ðenforced€by€guilty,€esteem,€and€shame,€and€what€is€enforced€by€the€power€of€the€state.€InÐ e  Ðmedieval€Europe€the€function€of€the€government€was€not€to€make€law,€but€to€discover€it,Ð e ÐasÔ#†Šä~ˆˆŠä~Ö#ÔÔ‡Šä~ˆˆŠä~ÔÔ#†Xê¨XˆŠä~”#ÔÔ‡Šä~ˆXXê¨Ô€Hayek€discusses€in€Volume€1,€Chapter€4€ofòò€óóhis€1973òò€Law,€Legislation€and€Liberty.óóÔ#†Šä~ˆˆŠä~î#ÔÔ‡Šä~ˆˆŠä~ÔÔ#†Xê¨XˆŠä~0#ÔÔ‡Šä~ˆXXê¨Ô€ItÐ e Ðwas€natural€for€Hayek€to€precede€his€discussion€of€laws€in€that€work€with€discussions€ofÐ e Ðthe€evolution€of€norms.€What€his€verbal€discussion€means€and€whether€it€is€correct€isÐ e Ðcontroversial,€as€detailed€in€Whitman€(1998)Ô#†Šä~ˆˆŠä~Ï#ÔÔ‡Šä~ˆˆŠä~ÔÔ#†Xê¨XˆŠä~#ÔÔ‡Šä~ˆXXê¨Ô,€but€the€basic€project€is€a€sound€one:€toÐ e Ðexamine€how€norms€evolve€and€the€extent€to€which€group€selection€favors€desirableÐ e Ðnorms.€Ð e ÐÌÔ#†Xê¨XˆŠä~°#ÔÔ‡Šä~ˆXXê¨Ôà  àWe€should€emphasize,€however,€that€norms€need€not€always€be€preceded€byÐ e Ðconventions.€Ô#†Šä~ˆˆŠä~n#ÔÔ‡Šä~ˆˆŠä~ÔFor€example,€Pettit€(1990)€and€McAdams€(1997)€claim€that€a€new€pattern€ofÐ e Ðapproval€and€disapproval€can€create€a€new€behavioral€regularity,€given€a€desire€forÐ e Ðesteem.Ô#†Šä~ˆˆŠä~k#ÔÔ‡Šä~ˆˆŠä~Ô€A€norm€arises€when€individuals€desire€esteem€and€these€three€conditions€hold:Ð e Ðthere€is€a€strong€pattern€of€approval€or€disapproval€for€a€given€activity,€there€is€a€risk€thatÐ e Ðothers€will€detect€oneððs€engaging€in€the€activity,€and€there€is€something€approachingÐ e Ðcommon€knowledge€of€the€approval€pattern€and€risk€of€detection.€Geisinger€(2002)€andÐ e  ÐMcAdams€(2000)€claim€that€law€can€facilitate€the€process€of€norm€emergence€byÐ e! Ðpublicizing€the€existence€of€a€new€consensus.€Ð e" ЀÔ#†Šä~ˆˆŠä~z#ÔÔ‡Šä~ˆˆŠä~ÔÔ#†Xê¨XˆŠä~´#ÔÐ e# Ðà  àà ` àÌò òÔ‡Šä~ˆXXê¨Ô4.€The€Importance€of€Norms€to€Legal€Analysisó óÐ Q%ì ! ÐÌà  àIn€this€section€we€describe€how€the€existence€and€operation€of€norms€affect€theÐ O'ê"# Ðpositive€and€normative€economic€analysis€of€law€and€legal€institutions.Ð O(ê#$ Ðà  àà ` àà ¸ àà  àà h àà À àà  àÌò òa.€Positive€Analysis:€How€Norms€Affect€Behavioró óÐ O*ê%& ÐÐ M+è&' Ðòò(i)€Generally.óó€Norms€matter€to€the€positive€economic€analysis€of€law€in€two€respects:€inÐ e Ðpredicting€how€a€change€in€legal€rules€affects€behavior,€and€in€explaining€how€law€isÐ e Ðmade.Ð e ÐÌà  à€One€cannot€accurately€predict€behavior€without€knowing€something€about€all€theÐ e Ðincentives€that€influence€behavior€ð!ð€which€includes€normative€incentives€ð!ð€as€well€as€theÐ e  Ðway€that€legal€change€interacts€with€them.€Economic€analysis€of€law€needs€to€considerÐ e  Ðcarefully€how€norms€may€govern€behavior€in€the€absence€of€law€and€how€a€new€legal€ruleÐ e  Ðmay€intentionally€or€unintentionally€change€(or€fail€to€change)€a€norm.€Ð e  ÐÌà  àNorms€are,€of€course,€highly€diverse€ð!ð€as€diverse€in€application€as€laws.€EllicksonÐ e  Ð(1991:€132)€has€usefully€categorized€rules€of€any€kind,€including€norms,€into€five€groups.Ð e  ÐòòSubstantiveóó€norms€concern€the€conduct€that€is€to€be€regulated€in€the€first€place,€and€theÐ e  Ðother€four€categories€are€ancillary.€òòRemedial€óónorms€prescribe€penalties€or€rewards€forÐ e  Ðnorm€violation,€òòproceduralóó€norms€determine€how€information€about€violation€is€to€beÐ e Ðcollected€and€used,€òòconstitutiveóó€norms€govern€how€norms€are€created,€andòò€controller„Ð e Ðselectingóó€norms€divide€the€labor€of€social€control€among€different€people.Ð e ÐÔ#†Xê¨XˆŠä~‚ #ÔÌÔ‡Šä~ˆXXê¨Ôà  à€Consider€the€norm€of€property€in€snowy„weather€parking€spots€in€ChicagoÐ Qì Ðdescribed€by€Epstein€(1999).€The€substantive€norm€says€that€only€the€person€who€dug€theÐ Qì Ðsnow€out€of€a€spot€is€entitled€to€park€there,€whereas€others€who€park€will€suffer€guilt,Ð Qì Ðdisesteem,€shame,€or€more€concrete€sanctions€(Mayor€Daley€said,€"I€tell€people,€ifÐ Qì Ðsomeone€spends€all€that€time€digging€their€car€out,€do€not€drive€in€that€spot.€This€isÐ Qì ÐChicago.€Fair€warning."Ô#†Šä~ˆˆŠä~ #ÔÔ‡Šä~ˆˆŠä~Ô).€Epstein€does€not€describe€the€ancillary€norms,€but€let€usÐ Qì Ðimagine€what€they€might€be.€The€remedial€norm€might€be€that€someone€who€parks€in€theÐ Qì Ðwrong€spot€will€have€his€car€window€broken.€The€procedural€norm€might€require€that€theÐ Qì Ðenforcer€make€some€attempt€to€find€and€warn€the€violator€before€he€resorts€to€violence.Ð Qì ÐThe€constitutive€norm€might€be€that€the€norm€can€be€changed€only€by€explicit€agreementÐ Qì Ðof€the€residents€of€a€street,€and€the€controller„selecting€norm€might€be€that€only€theÐ Q ì Ðð ðownerðð€of€a€space€is€allowed€to€punish€the€violator.€Ð Q!ì ÐÌà  àIgnoring€norms€(or€conventions)€can€cause€one€to€overstate€the€significance€of€law,Ð Q#ì Ðas€suggested€by€the€comments€of€Mayor€Daley,€the€official€ultimately€in€charge€ofÐ Q$ì  Ðenforcing€both€parking€and€vandalism€laws€for€the€City€of€Chicago.€Norms€matter€inÐ Q%ì ! Ðseveral€ways.€First,€economists€sometimes€assume€that€a€legal€rule€influences€behavior,Ð Q&ì!" Ðwhen€an€empirical€investigation€would€show€that€the€legal€rule€has€no€influence€becauseÐ Q'ì"# Ðgroup€norms€exclusively€govern€the€behavior.€Ellickson€(1986,€1991)€famously€found€thatÐ Q(ì#$ Ðranchers€in€Shasta€County,€California€ignored€legal€rules€concerning€animal€trespass€andÐ Q)ì$% Ðresolved€disputes€over€cattle€trespass€damages€according€to€ð ðneighborlyðð€norms,€evenÐ Q*ì%& Ðthough€they€had€the€legal€right€to€go€to€court.€Indeed,€often€one€group€norm€is€thatÐ Q+ì&' Ðmember€should€never€make€use€of€their€legal€rights.€For€similar€results€concerningÐ e Ðworkplace€norms€(or€conventions)€and€law,€see€Kim€(1999)€and€Rock€&€Wachter€(2002).Ð e ÐÔ#†Šä~ˆˆŠä~#ÔÔ#†Xê¨XˆŠä~¦#ÔÔ‡Šä~ˆXXê¨ÔÔ‡Šä~ˆˆŠä~ÔEither€can€be€strong€enough€to€trump€lawsÔ#†Xê¨XˆŠä~Ê#Ô.Ô#†Xê¨XXXê¨é#ÔÔ‡Xê¨XXXê¨ÔÔ‡Šä~ˆXXê¨Ô€Second,€one€might€think€a€legal€rule€aÐ e Ðnecessary€condition€of€some€observed€behavioral€regularity€when€a€norm€would€maintainÐ e Ðthe€same€(or€nearly€the€same)€regularity€without€the€law.€For€example,€a€norm€thatÐ e Ðpromises€must€be€kept€might,€in€identifiable€circumstances,€produce€as€much€promise„Ð e  Ðkeeping€as€legal€liability,€or€at€least€enough€so€as€to€make€the€costs€of€legal€enforcementÐ e  Ðno€longer€worthwhile€(Macaulay€1963;€Scott€2003).€Third,€one€might€overestimate€theÐ e  Ðability€of€legal€change€to€produce€a€behavioral€change€by€underestimating€the€degree€toÐ e  Ðwhich€the€existing€behavior€is€driven€by€norms€(Kahan€2000).€Ð e  ÐÌà  àOn€the€other€hand,€ignoring€norms€can€also€cause€one€to€òòunderóóstate€theÐ e  Ðsignificance€of€law.€Economists€sometimes€assume€that€a€legal€rule€is€òònotóó€necessary€toÐ e  Ðchange€behavior€when€on€closer€analysis€they€would€find€that€without€new€laws,€normsÐ e  Ðwill€freeze€the€behavior€in€place.€For€example,€market€competition€might€not€eliminateÐ e Ðrace€discrimination€if€social€norms€require€such€discrimination€(McAdams€(1995)).Ð e ÐMoreover,€changing€a€law€might€have€a€greater€effect€if€legal€sanctions€work€not€justÐ e Ðdirectly,€by€raising€the€price€of€a€behavior,€but€indirectly,€by€changing€norms.€A€new€lawÐ e Ðmight€change€perceptions€of€what€incurs€disapproval€(McAdams€2000),€create€a€newÐ e Ðbasis€for€shame,€or€even€change€a€personððs€own€preferences€and€create€guilt€asÐ e ÐDau-Schmidt€(1990)€discusses€in€the€context€of€criminal€law.€Kahan€(2003)€writes€of€theÐ e Ðpervasive€norm€of€ð ðreciprocity,ðð€which€he€believes€underlies€much€mutually€productiveÐ e Ðcooperation€in€both€small€groups€and€society€generally,€but€notes€many€ways€that€law€canÐ e Ðunintentionally€undermine€or€intentionally€facilitate€such€reciprocity.€Ô#†Šä~ˆˆŠä~x#ÔÔ‡Šä~ˆˆŠä~ÔThe€extent€to€whichÐ e Ðthe€law€actually€does€affect€norms€ð!ð€and€the€ease€with€which€such€claims€for€new€lawsÐ e Ðcan€be€made€ð!ð€is€an€interesting€question€discussed€in€number€of€articles,€e.g.,€Posner€&Ð e ÐRasmusen€(1999),€Picker€(1997),€Hetcher€(1999),€Dharmapala€&€McAdams€(2003);Ð e ÐMcAdams€(2000);€and€Kahan€(2000).€Ellickson€(2001)€addresses€the€issue€by€comparingÐ e Ðthe€ability€of€government€and€private€ð ðnorm€entrepreneursðð€to€change€norms.€EmpiricalÐ e  Ðwork€is€harder€to€come€by,€but€see€Massell€(1968)€on€law€and€change€in€Soviet€CentralÐ e! ÐAsia.€Ô#†Šä~ˆˆŠä~3'#ÔÔ‡Šä~ˆˆŠä~Ôà  àà ` àà ¸ àÐ e" ÐÌà  àPositive€analysis€of€law€also€seeks€to€explain€a€second€point:€why€particular€law„Ð e$  Ðmaking€institutions€ð!ð€the€legislature,€courts,€or€administrative€agencies€ð!ð€create€particularÐ e%!! Ðlaws.€Often€one€cannot€fully€explain€the€existence€of€a€law€without€understanding€theÐ e&"" Ðnorms€that€give€rise€to€it€,€or€the€absence€of€norms€that€would€block€it.€Where€publicÐ e'## Ðchoice€theory€emphasizes€the€material€interests€citizens€have€in€enacting€or€defeatingÐ e($$ Ðlegislation,€attention€to€norms€reveals€that€many€people€are€highly€motivated€to€createÐ e)%% Ðrules€that€do€not€affect€their€material€interests.€A€person€who€believes€that€certainÐ e*&& Ðbehaviors€are€immoral€ð!ð€e.g.,€pornography,€abortion,€flag€burning,€animal€testing,€orÐ e+'' Ðenvironmental€exploitation€ð!ð€often€favors€laws€forbidding€or€restricting€such€behavior.€InÐ e Ðturn,€in€a€democratic€system,€such€peopleððs€votes€give€the€legislature€incentive€to€enactÐ e Ðlaws€supporting€the€norm.€Or,€if€the€political€system€gives€him€enough€slack,€theÐ e Ðlegislator,€judge,€or€administrator€may€use€his€power€to€enforce€the€behavior€he€views€asÐ e Ðmorally€required.€Ð e ÐÌà  àWhy€would€voters€or€lawmakers€believe€a€law€is€necessary€if€the€behavior€isÐ e  Ðalready€enforced€by€guilt,€disapproval€or€other€normative€incentives?€An€obvious€reasonÐ e  Ðis€that€the€existence€of€a€norm€does€not€imply€perfect€compliance€.€Many€people€willÐ e  Ðoccasionally€face€situations€where€the€expected€benefits€of€norm€violation€exceed€theÐ e  Ðexpected€costs,€and€certain€people€may€never€obey€the€norm€because€they€feel€no€guiltÐ e  Ðfrom€violating€it€and€can€avoid€detection.€Another€reason,€more€in€keeping€with€publicÐ e  Ðchoice€theory,€is€that€even€the€norm,€much€less€compliance,€might€not€be€universal.Ð e  ÐDifferent€lawmakers€will€push€to€enforce€the€norms€of€the€groups€that€support€them,Ð e  Ðnorms€which€come€into€conflict€just€as€much€as€budget€priorities,€and€often€with€moreÐ e Ðbitterness€because€of€the€normatized€preferences€of€each€group€and€the€difficulty€ofÐ e Ðcompromise.€It€is€hard€to€ð ðsplit€the€differenceðð€on€abortion.Ð e ÐÌà  àStill€another€motivation€for€laws€as€a€supplement€for€norms€is€that€the€lawmakerÐ e Ðmay€gain€from€purely€symbolic€endorsement€of€a€norm,€even€if€that€endorsement€is€notÐ e Ðexpected€to€change€behavior.€There€may€be€no€observed€flag„burning€in€a€jurisdictionÐ e Ðwith€strong€patriotic€norms,€but€voters€may€want€Ô#†Šä~ˆˆŠä~#*#ÔÔ‡Šä~ˆˆŠä~Ôto€go€further€and€express€theirÐ e Ðdisapproval€by€a€symbolic€declaration.€Indeed,€it€is€all€the€easier€to€pass€such€a€law€ifÐ e Ðnobody€in€the€jurisdiction€actually€does€want€to€burn€a€flag€so€no€resources€would€have€toÐ e Ðbe€devoted€to€enforcement.€Closely€related€is€the€function€of€laws€as€helping€to€create€andÐ e Ðperpetuate€norms€ð!ð€one€of€the€ð ðexpressiveðð€functions€of€law€discussed€in€Dharmapala€&Ð e ÐMcAdams€(2003),€Geisinger€(2002)€and€McAdams€(2000).€By€saying€what€people€òòshouldóóÐ e Ðdo,€even€if€there€is€no€penalty,€the€law€tries€to€shift€or€maintain€tastes,€and€to€educate€aÐ e Ðsocietyððs€newcomers€ð!ð€children€and€immigrants€ð!ð€in€its€norms.€Law€may€serve€the€sameÐ e  Ðfunction€as€the€ð ðritualsðð€that€Cappel€(2003)€discusses,€reinforcing€attitudes€by€aidingÐ e! Ðcommunication€of€what€is€esteemed€or€by€actually€changing€tastes€by€changing€habits€(onÐ e" Ðwhich€see€the€experiments€in€Wells€&€Petty€(1980):€subjects€instructed€to€nod€their€headsÐ e# Ðð ðYesðð€repeatedly€while€listening€to€someone€speak€came€to€agree€more€with€what€theÐ e$  Ðspeaker€said).Ô#†Šä~ˆˆŠä~Ü5#ÔÔ‡Šä~ˆˆŠä~ÔÐ e%!! ÐÌòò(ii)€Specific€Norms€Regarding€Law.óó€Besides€these€general€points,€some€specific€law„Ð e'## Ðrelated€norms€have€particular€relevance€for€positive€legal€analysis.€The€most€important€areÐ e($$ Ðthe€norms€of€ð ðlegal€obedienceðð€ð!ð€that€people€should€obey€the€law€ð!ð€and€ð ðthe€rule€of€lawððÐ e)%% Ðð!ð€that€laws€should€be€knowable€in€advance€rather€than€the€purely€discretionary€decision€ofÐ e*&& Ðsome€authority.€Ð e+'' Їà  àPeople€often€feel€obliged€to€obey€laws,€or€at€least€laws€they€perceive€to€beÐ e Ðð ðlegitimateðð€from€the€very€fact€that€they€are€laws,€rather€than€from€any€other€motivation.Ð e ÐThese€people€suffer€guilt,€shame,€or€disapproval€from€breaking€the€law.€The€norm€of€legalÐ e Ðobedience€provides€an€incentive€to€obey€the€law€that€is€independent€of€material€sanctionsÔ#†Šä~ˆˆŠä~(;#ÔÔ‡Šä~ˆˆŠä~ÔÐ e Ð(though€if€it€is€based€on€esteem€and€disapproval€it€still€depends€on€violations€beingÐ e Ðdetected).€This€effect€is€particularly€important€for€offenses€that€areòò€malum€in€prohibitumóó€ð!ðÐ e  Ðwrong€only€because€illegal€ð!ð€because€the€prohibited€act€Ô#†Šä~ˆˆŠä~?#ÔÔ‡Šä~ˆˆŠä~Ôis€not€itself€governed€by€a€normÔ#†Šä~ˆˆŠä~”@#ÔÔ‡Šä~ˆˆŠä~ÔÐ e  Ðand€the€only€relevant€norm€is€legal€obedience.€One€should€not€bring€more€than€$10,000€inÐ e  Ðcurrency€into€the€United€States€without€declaring€it€on€the€customs€form,€but€only€becauseÐ e  Ðit€is€a€legal€wrong.Ô#†Šä~ˆˆŠä~ö@#ÔÔ‡Šä~ˆˆŠä~Ô€Ô#†Šä~ˆˆŠä~=B#ÔÔ‡Šä~ˆˆŠä~ÔBy€contrast,€the€norm€against€òòmalum€in€seóó€offenses€such€as€murder€isÐ e  Ðindependent€of€its€illegality.€One€should€not€kill€unjustifiably,€because€that€is€a€moralÐ e  Ðwrongð!ð€which€also€happens€to€be€a€legal€wrong.€(Other€acts€may€be€òòmalum€in€seóó€but€notÐ e  Ðòòmalum€in€prohibitumóó,€e.g.,Ô#†Šä~ˆˆŠä~€B#ÔÔ‡Šä~ˆˆŠä~Ô€adultery€in€the€United€States€of€2004,€as€discussed€inÐ e  ÐRasmusen€(2002)€and€Shavell€(2002)).Ô#†Šä~ˆˆŠä~"D#ÔÔ‡Šä~ˆˆŠä~ÔÐ e  ÐÌ€à  à€Related€to€the€norm€of€legal€obedience€is€the€ideal€of€ð ðthe€rule€of€law.ðð€DefiningÐ e Ðthis€norm€is€difficult,€but€a€central€element€is€the€idea€that,€as€Fallon€(1997:3)€puts€it€ð ðtheÐ e Ðlaw€ð!ð€and€its€meaning€ð!ð€must€be€fixed€and€publicly€known€in€advance€of€application,€soÐ e Ðthat€those€applying€the€law,€as€much€as€those€to€whom€it€is€applied,€can€be€bound€by€it.ððÐ e ÐThis€norm€constrains€government€officials€who€wield€official€power,€a€non„legal€sanctionÐ e Ðagainst€their€illegal€use€of€discretion€or€violation€of€rules.€Thus,€the€rule€of€law€isÐ e Ðcontrasted€with€ð ðthe€rule€of€men.ðð€The€norm€of€the€rule€of€law€is€of€great€significance€toÐ e Ðhow€well€laws€work,€since€the€alternative€is€costly,€perhaps€prohibitively€costly,Ð e Ðmonitoring€of€executive€and€judicial€officials.€Development€economics€is€by€now€quiteÐ e Ðconscious€that€it€is€not€enough€to€establish€good€laws;€one€must,€in€addition,€eliminateÐ e Ðcorruption€and€enforce€laws€fairly.€See€Rose„Ackerman€(1999);€Brooks€(2003).€We€willÐ e Ðnot€go€into€the€large€topic€of€jurisprudence,€but€merely€note€that€it€is€an€area€in€which€theÐ e Ðlaw„and„economics€of€norms€might€be€usefully€applied.Ð e ÐÌà  àOther€norms€govern€specific€legal€actors.€To€understand€how€a€legal€institutionÐ e! Ðworks,€one€must€understand€the€norms€governing€that€institution.€For€example,€given€howÐ e" Ðcentral€the€jury€is€to€the€legal€system,€it€is€odd€how€little€attention€economists€have€paid€toÐ e# Ðthe€fact€that€jurors€are€paid€by€the€day€(and€frequently€less€than€their€forgone€wage)€ratherÐ e$  Ðthan€based€on€the€quality€of€their€understanding€or€resolution€of€the€case.€Pettit€(1990)Ð e%!! Ðnotes€that€without€normative€motivations€the€successes€of€juries€are€puzzling,€but€thatÐ e&"" Ðwith€such€motivations€we€may€explain€why€jurors€pay€attention€to€evidence,€deliberate,Ð e'## Ðand€vote€according€to€their€evaluation€of€the€evidence.€Ð e($$ ÐÌà  àSimilarly,€other€group€norms€besides€the€norm€of€the€rule€of€law€appear€to€beÐ e*&& Ðimportant€ð!ð€if€not€entirely€effective€ð!ð€in€constraining€the€behavior€of€judges,€legislators,Ð e+'' Ðprosecutors,€police,€and€other€executive€branch€officials.€A€particularly€interesting€set€ofÐ e Ðlaw„related€norms€are€those€governing€lawyers.€Many€of€the€ethical€rules€governingÐ e Ðlawyers€lack€genuine€sanctions€and€may€be€understood€as€efforts€to€strengthen€or€createÐ e Ðprofessional€norms€(Painter€2001;€Wendel€2001€ð!ð€though€see€Fischel€1998€for€a€moreÐ e Ðskeptical€view).€There€is€some€empirical€evidence€that€norms€even€constrain€the€feesÐ e Ðlawyers€seek€(Baker€2001),€though€here€there€may€be€difficulty€separating€norms€fromÐ e  Ðconvention€or€private€rules.€An€interesting€example€is€òòGoldfarb€v.€Virginia€State€Baróó,€421Ð e  ÐU.S.€773€(òòóó1975),€which€concerns€whether€a€bar€association€may€expel€members€whoÐ e  Ðcharge€a€fee€below€a€posted€minimum€as€unethicalÔ#†Šä~ˆˆŠä~ÔD#ÔÔ‡Šä~ˆˆŠä~ÔÔ#†Xê¨XˆŠä~—#ÔÔ‡Šä~ˆXXê¨Ô.€òòGoldfarbóó€examines€an€industry€groupÐ e  Ðthat€seeks€to€regulate€itself€with€professional€norms,€which€shade€into€organizational€rulesÐ e  Ðand€then€into€law.€Ð e  ÐÌÔ#†Šä~ˆˆŠä~{R#ÔÔ‡Šä~ˆˆŠä~Ôòò(iii)€Specific€Laws€Regarding€Norms.óó€Often€one€cannot€understand€the€meaning€of€aÐ e  Ðspecific€legal€rule€without€understanding€the€norms€or€conventions€to€which€the€ruleÐ e  Ðexplicitly€or€implicitly€refers.Ô#†Šä~ˆˆŠä~ÙS#Ô€At€one€extreme,€law€simply€incorporates€certain€customs€òòinÐ e Ðtotoóó.€Cooter€&€Fikentscher€(1998:315)€gives€an€example:€Ð e ÐÌà8  àWhen€making€Indian€common€law,€tribal€judges€confront€a€central€problemÐ e Ðin€legal€anthropology:€How€to€distinguish€customary€obligations€that€areÐ e Ðenforceable€at€law€(which€can€be€called€"common€law")€from€customaryÐ e Ðobligations€that€are€not€enforceable€at€law€(which€can€be€called€"mereÐ e Ðcustoms")?€Put€succinctly,€the€problem€is€to€distinguish€"law€from€custom."Ð e ÐIf€a€custom€is€law,€then€legal€officials€are€obligated€to€enforce€it,€whereas€ifÐ e Ðcustom€is€not€law,€then€legal€officials€require€an€independent€justificationÐ e Ðfor€enforcing€it.Ô‡Šä~ˆˆŠä~ÔÐeÐ Ð  ÐÌObviously,€in€this€case,€one€cannot€know€the€content€of€the€law€without€knowing€theÐ e Ðcontent€of€the€custom€(convention€or€norm)€it€enforces.Ð e ÐÌà  àNorms€are€also€used€more€narrowly,€to€flesh€out€statutes€or€judge„made€law€ratherÐ e! Ðthan€to€create€laws€out€of€whole€cloth.€Rather€than€fully€specifying€a€substantive€standard,Ð e" Ðmany€legal€rules€and€doctrines€ð ðincorporate€by€referenceðð€Ô#†Šä~ˆˆŠä~dX#ÔÔ‡Šä~ˆˆŠä~Ôexisting€customs€or€practices,Ð e# Ðwhich€in€some€contexts€means€norms€and€in€other€contexts€means€conventions.€LegalÐ e$  Ðdefinitions€of€obscenity€explicitly€incorporate€local€ð ðcommunity€standardsðð€(see€òòJenkinsÐ e%!! Ðv.€Georgiaóó€418€US€153€[1974]).€Given€the€strong€normative€attitudes€about€the€depictionÐ e&"" Ðof€sex€acts,€the€ð ðstandardsðð€that€the€law€incorporates€are€norms.€Also,€various€torts€ð!ð€e.g.,Ð e'## Ðbattery,€invasion€of€privacy,€and€intentional€infliction€of€emotional€distress€ð!ð€includeÐ e($$ Ðopen„ended€elements€such€as€outrageousness€or€the€absence€of€a€customary€privilege€thatÐ e)%% Ðimplicitly€incorporate€norms.€Both€the€crime€and€the€tort€of€battery€refer€in€part€to€theÐ e*&& Ðð ðoffensiveðð€touching€of€a€person,€which€refers€to€norms.€Ô#†Šä~ˆˆŠä~žZ#ÔÔ‡Šä~ˆˆŠä~ÔOther€rules€incorporate€normsÐ e+'' Ðonly€indirectly€or€implicitly.€Defamation€law€determines€that€certain€statements€areÐ e Ðdefamatory€per€se€because€they€presumptively€hurt€the€individualððs€reputation.€What€isÐ e Ðdefamatory€per€se€is€often€the€accusation€of€a€norm€violation€ð!ð€òòe.g.óó,€accusing€a€person€ofÐ e Ðcommitting€adulteryÔ#†Šä~ˆˆŠä~b^#ÔÔ‡Šä~ˆˆŠä~Ô.€In€recent€years,€changing€attitudes€towards€homosexuality€haveÐ e Ðmade€norms€a€subject€of€interest€to€courts€trying€to€determine€what€is€defamatory€ð!ð€see,Ð e Ðfor€example,€òòDonovan€v.€Fiumaraóó,€114€N.C.€App.€524€(1994)Ô#†Šä~ˆˆŠä~8`#Ô.€In€many€statutes,€theÐ e  Ðcrimes€of€extortion,€coercion,€or€blackmail€includes€the€threat€to€reveal€any€secret€thatÐ e  Ðwill€tend€to€expose€the€victim€to€ð ðhatred,€contempt€or€ridicule,ðð€which€often€includes€theÐ e  Ðthreat€to€reveal€a€norm€violation.€See€Model€Penal€Code€Ô‡Šä~ˆˆŠä~Ôðð€Ô#†Šä~ˆˆŠä~Åb#ÔÔ‡Šä~ˆˆŠä~Ô223.4€(1985)€(Theft€byÐ e  ÐExtortion)€and€Ô#†Šä~ˆˆŠä~ c#ÔÔ‡Šä~ˆˆŠä~Ôðð€Ô#†Šä~ˆˆŠä~ˆc#Ô212.5€(Criminal€Coercion).€A€full€understanding€of€the€content€of€theÐ e  Ðlaw€in€these€cases€(and€others)€must€correctly€understand€the€content€of€a€norm.€AÐ e  Ðpositive€analysis€of€the€consequences€of€the€legal€rule€must€also€consider€possibleÐ e  Ðdynamic€effects€of€incorporating€the€norm€into€the€rule.€Ð e  ÐÌÔ‡Šä~ˆˆŠä~Ôò òb.€Normative€Analysis:€How€Norms€Affect€Welfareó óÐ e ÐÌà  àHow€does€the€normative€analysis€of€law€need€to€account€for€norms?€BroadlyÐ cþ Ðspeaking,€there€are€two€issues.€First,€how€should€welfare€analysis€incorporate€theÐ cþ Ðexistence€of€norms€and€normative€incentives?€Second,€when€are€norms€efficient€ð!ð€or,Ð cþ Ðmore€to€the€point,€when€are€they€preferable€to€law€as€a€way€to€regulate€behavior?€Ð cþ ÐÌòò(i)€Welfare€analysis.óó€Norms€change€the€welfare€calculus€in€several€ways.€First,€we€mustÐ cþ Ðincorporate€guilt,€esteem,€shame€and€pride€into€welfare€via€their€direct€effects€on€utility.Ð cþ ÐKaplow€&€Shavell€2001a,€2002b€examine€how€the€normative€incentives€of€guilt€and€prideÐ cþ Ð(which€they€term€ð ðvirtueðð)€affect€the€welfare€analysis€of€legal€and€moral€rules.€Ideally,Ð cþ Ðthere€is€a€set€of€guilt€and€pride€inclinations€that€ensures€optimal€behavior€by€eachÐ cþ Ðindividual.€Individuals€sufficiently€motivated€would€act€optimally€and€therefore€neverÐ cþ Ðhave€to€incur€guilt,€which€otherwise€decreases€welfare.€But€Kaplow€&€Shavell€introduceÐ cþ Ðreasonable€constraints€that€complicate€the€analysis:€that€the€process€of€inculcating€guiltÐ c þ Ðand€pride€is€costly,€that€there€is€some€psychological€limit€to€the€degree€of€guilt€or€prideÐ c!þ Ðindividuals€can€feel,€and€that€guilt€or€pride€can€be€inculcated€only€for€broad€ð ðnaturalððÐ c"þ Ðgroupings€of€acts€ð!ð€such€as€lying€ð!ð€rather€than€for€each€particular€act€depending€on€itsÐ c#þ Ðwelfare€effect€ð!ð€such€as€an€inefficient€lie.€The€result€is€a€series€of€interesting€tradeoffsÐ c$þ  Ðbetween€the€use€of€guilt€and€pride€and€the€optimal€groupings€of€acts.€Shavell€(2002)€thenÐ c%þ ! Ðexamines€the€optimal€tradeoff€between€the€use€of€these€moral€motivations€and€the€legalÐ c&þ!" Ðsystem.€The€advantage€of€morality€is€that,€compared€to€law,€it€is€cheap€and€its€internalÐ c'þ"# Ðincentives€work€without€the€external€detection€of€anti„social€acts.€But€the€legal€system€canÐ c(þ#$ Ðimpose€rules€involving€finer€gradations€in€conduct€than€guilt„enforced€morality,€canÐ c)þ$% Ðchange€the€rules€more€quickly€than€morality€in€response€to€changed€circumstances,€andÐ c*þ%& Ðcan€usually€impose€higher€sanctions€for€the€most€tempting€suboptimal€acts.Ð c+þ&' ÐÔ#†Šä~ˆˆŠä~Ge#ÔÌà  àSecond,€people€who€can€feel€guilt€or€pride€in€their€own€behavior€will€likely€feelÐ e Ðsimilar€emotions€as€a€consequence€of€observing€the€behavior€of€others,€including€that€ofÐ e Ðgovernment€agents€acting€on€their€behalf.€Thus,€individuals€may€believe€that€certain€legalÐ e Ðoutcomes€are€ð ðfairðð€or€ð ðunfair,ðð€and€thereby€gain€or€lose€utility€from€observing€theÐ e Ðoutcomes.€If€so,€the€welfare€analysis€of€legal€rules€must€account€for€these€effects€onÐ e  Ðutility.€For€example,€several€theorists,€such€as€Polinsky€&€Shavell€(2000),€Sunstein,Ð e  ÐSchkade€&€Kahneman€(2000),€Ô‡Šä~ˆˆŠä~Ôand€Kaplow€&€Shavell€(2002),€consider€the€significance€ofÐ e  Ðthe€popular€view€that€punishment€should€be€proportionate€to€the€crime.€Those€holding€thisÐ e  Ðview€may€suffer€disutility€if€maximal€sanctions€are€imposed€for€non„serious€offenses.Ð e  ÐConsequently,€even€if€maximal€sanctions€(and€minimal€levels€of€detection)€wouldÐ e  Ðotherwise€be€socially€optimal,€they€might€be€suboptimal€once€we€include€the€disutility€ofÐ e  Ðdisproportionality.€This€argument€is€open€to€abuse,€since€it€can€be€called€in€to€defend€anyÐ e  Ðpolicy€that€some€people€favor,€but€that€does€not€so€much€diminish€its€validity€as€call€forÐ e  Ðempirical€validation€of€claims€that€the€utility€effect€is€large€enough€to€matter.€Moreover,€itÐ e Ðprovides€one€way€to€interpret€the€ð ðretributiveðð€function€of€punishment:€observers€feelÐ e Ðutility€when€they€observe€misbehavior€punished€proportionately,€and€feel€disutility€whenÐ e Ðmisbehavior€receives€disproportionately€low€punishment,€including€the€extreme€case€ofÐ e Ðescaping€punishment€altogether.Ð e ÐÌà  àThird,€normative€analysis€must€address€the€question€of€whether€the€social€objectiveÐ e Ðfunction€should€incorporate€norms€merely€via€their€effect€on€the€utilities€of€individuals€orÐ e Ðin€addition€to€those€utilities.€If€the€objective€function€maximizes€utility,€it€will€take€intoÐ e Ðaccount,€for€example,€the€distress€that€people€feel€at€what€they€consider€to€be€ð ðunfairððÐ e Ðoutcomes,€but€the€social€planner€might€wish€to€reduce€ð ðunfairnessðð€even€beyond€theÐ e Ðeffect€on€utilities.€This€double„counting€might€be€legitimate,€but€the€analyst€should€beÐ e Ðaware€of€what€he€is€doing,€and€double„counting€necessarily€means€abandonment€of€ParetoÐ e Ðoptimality,€which€is€an€important€argument€against€it.€See€Kaplow€&€Shavell€(2001,Ð e Ð2002a).€The€logic€of€conventional€welfare€economics,€with€its€criteria€of€efficiency€orÐ e  Ðwealth€maximization,€requires€instead€that€norms€enter€via€their€effects€on€utilities.Ô#†Šä~ˆˆŠä~Nr#ÔÐ e! ÐRichard€Zerbeððs€2001€book,€òòEfficiency€in€Law€and€Economicsóó,€Ô‡Šä~ˆˆŠä~Ôis€useful€in€clarifying€this,Ð e" Ðand€in€showing€how€norms€in€utility€functions€can€be€operationalized€by€looking€at€aÐ e# Ðpersonððs€willingness€to€pay€to€have€a€norm€obeyed.€à p àà È àà  àÐ e$  ÐÌà  àAll€three€of€these€welfare€considerations€treat€norms€as€exogenous.€We€previouslyÐ e&"" Ðnoted,€however,€that€the€law€might€in€some€cases€influence€norms,€which€can€involveÐ e'## Ð(when€guilt€inclinations€are€changed)€a€change€in€tastes.€The€welfare€analyst€mustÐ e($$ Ðtherefore€decide€how€to€deal€with€the€possibility€of€preference€change.€Ô#†Šä~ˆˆŠä~ê{#ÔÔ‡Šä~ˆˆŠä~ÔEconomists€sinceÐ e)%% ÐStrotz€(1955)Ô#†Šä~ˆˆŠä~À~#ÔÔ‡Šä~ˆˆŠä~Ô€Ô#†Šä~ˆˆŠä~4#ÔÔ‡Šä~ˆˆŠä~Ôhave€studied€the€problem€of€how€to€do€welfare€analysis€when€tastes€areÐ e*&& Ðvariable€or€when€people€are€poorly€informed.Ô#†Šä~ˆˆŠä~w#ÔÔ‡Šä~ˆˆŠä~Ô€Ô#†Šä~ˆˆŠä~@€#ÔÔ‡Šä~ˆˆŠä~ÔFor€example,€legal€rules€against€raceÐ e+'' Ðdiscrimination€might€initially€generate€direct€utility€for€people€who€regard€such€rules€asÐ e Ðfair€and€disutility€for€people€who€regard€them€as€unfair.€But€if€the€rules€produce€a€changeÐ e Ðin€preferences€over€time,€diminishing€the€internalized€norm€of€discrimination,€staticÐ e Ðanalysis€will€be€misleading€(Kaplow€&€Shavell€(2002)).€If€the€analyst€knows€that€an€Ô#†Šä~ˆˆŠä~ƒ€#ÔÔ‡Šä~ˆˆŠä~Ôanti„Ð e Ðdiscrimination€law€will€lead€an€individual€to€change€his€preferences€and€actually€preferÐ e Ðthe€law€after€five€years,€should€the€individualððs€present€preferences€trump€his€futureÐ e  Ðpreferences?€Should€this€be€the€case€even€if€the€individual€knows€how€he€will€change?Ð e  ÐSuch€questions€have€been€much€discussed€in€various€contexts;€see€Dau„Schmidt€(1990),Ð e  ÐKuran€(1995);€and€Ng€(1999).Ô#†Šä~ˆˆŠä~œ‚#ÔÔ‡Šä~ˆˆŠä~ÔÐ e  ÐÌà  àCooter€(1998)€links€norms€to€the€concept€of€a€ð ðPareto€self„improvementðð:€anÐ e  Ðindividual€who€perceives€the€advantage€of€having€different€preferences,€even€from€theÐ e  Ðvantage€point€of€his€existing€preferences,€may€work€to€change€his€preferences.€For€aÐ e  Ðcritique,€see€McAdams€(1998).€Ô#†Šä~ˆˆŠä~„#ÔÔ‡Šä~ˆˆŠä~ÔIf€people€are€poorly€informed,€however,€there€can€be€aÐ e  Ðconflict€between€maximizing€their€utility€ex€ante€ð!ð€making€the€choices€that€they,€withÐ e Ðtheir€poor€information,€would€make€ð!ð€and€ex€post€ð!ð€the€choices€they€would€have€made€ifÐ e Ðwell€informed.€Ô#†Šä~ˆˆŠä~}†#ÔÔ‡Šä~ˆˆŠä~ÔRichard€Posner€applies€this€idea€in€his€1992€òòSex€and€Reasonóó,€in€which€heÐ e Ðsuggests€that€norms€against€sexual€practices€such€as€homosexuality€would€disappear€ifÐ e Ðtheir€holders€had€better€information.€The€big€practical€problem,€of€course,€is€determiningÐ e Ðwhose€information€is€wrong,€since€each€side€may€well€believe€that€the€otherððs€beliefs€areÐ e Ðsincere€but€misguided.€Ð e ÐÌà  àWelfare€analysis€of€preference€change€is€particularly€complex€in€the€case€ofÐ e Ðinterdependent€utility€functions.€The€norm€of€retribution,€for€example,€may€be€supportedÐ e Ðby€preferences€in€which€one€derives€utility€from€the€disutility€of€another€ð!ð€the€offenderÐ e Ð(see€Kahan€(1998)).€By€contrast,€altruism€may€underlie€norm€of€gift„giving,€which,€asÐ e ÐKaplow€(1995)€explains,Ô#†Šä~ˆˆŠä~ø‡#ÔÔ‡Šä~ˆˆŠä~Ô€increases€the€utility€both€of€the€individual€holding€the€norm€andÐ e Ðof€others€on€whom€he€acts.€Ô#†Šä~ˆˆŠä~à‹#ÔÔ‡Šä~ˆˆŠä~ÔJohn€Stuart€Mill€is€hostile€to€what€he€calls€ð ðother„regardingððÐ e Ðpreferences€in€òòOn€Libertyóó€(1859),€though€as€has€been€pointed€out€in€Kaplow€&€ShavellÐ e  Ð(2002)€and€James€Fitzjames€Stephenððs€òòLiberty€Equality€Fraternityóó€(1873),€his€own€tone€isÐ e! Ðhighly€moralistic,€and€sufficiently€obscure€that€it€is€hard€to€make€sense€of€how€he€decidesÐ e" Ðwhich€nonmaterialistic€preferences€are€legitimate€and€which€are€not.Ô#†Šä~ˆˆŠä~”Œ#ÔÔ‡Šä~ˆˆŠä~ÔÐ e# ÐÔ#†Šä~ˆˆŠä~ÈŽ#ÔÔ‡Šä~ˆˆŠä~ÔÌòò(ii)€Norms€versus€Law.óó€The€second€broad€issue€is€whether€norms,€or€certain€identifiableÐ e%!! Ðclasses€of€norms,€are€òògenerallyóó€efficient€or€inefficient.€This€matters€to€whether€theÐ e&"" Ðcoverage€of€law€should€be€expanded€or€shrunk.€Ð e'## ÐÌà  àNorms€have€the€obvious€advantage€of€low€transactions€costs€compared€to€law.Ð e)%% ÐThey€do€not€require€police,€courts,€collection€agencies,€or€prisons.€If€they€are€fullyÐ e*&& Ðinternal,€they€do€not€even€require€detection.€Thus,€they€seem€particularly€appropriate€forÐ e+'' Ðregulating€externalities€too€small€to€justify€appeal€to€the€courts,€or€for€those€whoseÐ e Ðdetection€and€proof€are€particularly€difficult.€On€the€other€hand,€norms€are€trickier€toÐ e Ðcreate€than€laws,€and€are€not€typically€the€subject€of€policy€discussion.€Rather,€the€usualÐ e Ðquestion€is€whether€society€should€create€laws€to€supplant€norms.€Ð e ÐÌà  àLegal€authorities€will€often€wish€to€defer€generally€(rather€than€case€by€case)€toÐ e  Ðnorms€in€domains€whereÔ#†Šä~ˆˆŠä~#ÔÔ‡Šä~ˆˆŠä~ÔÔ#†Xê¨XˆŠä~½R#ÔÔ‡Šä~ˆXXê¨Ô€norms€are€more€efficient€regulators€of€human€conduct€than€legalÐ e  Ðrules.€Thus,€one€needs€to€compare€the€efficiency€of€legal€rules€to€decentralized€norms.Ð e  ÐEric€Posner€(1996)€examines€the€case€for€deferring€to€norms€in€groups€governed€by€them.Ð e  ÐLegal€regulations€intended€to€protect€individuals€may€have€the€unintended€consequence€ofÐ e  Ðlowering€the€value€of€group€membership,€thus€weakening€the€power€of€groups€to€enforceÐ e  Ðtheir€norms.€Thus,€the€efficient€legal€rule€might€be€one€of€non„interference.€ShavellÐ e  Ð(2002)€makes€a€general€comparison€of€the€comparative€advantages€of€law€and€morality,Ð e  Ðwhere€morality€includes€both€internalized€and€non„internalized€norms.€Ð e  ÐÌà  àWhether€norms€are€generally€efficient,€or€even€efficient€in€identifiableÐ e Ðcircumstances,€is€contested.€Everyone€acknowledge€the€existence€of€dysfunctional€n