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This paper analyzes how private decisions and public policies are shaped by personal and societal preferences ("values"), material or other explicit incentives ("laws") and social sanctions or rewards ("norms"). It first examines how honor, stigma and social norms arise from individuals' behaviors and inferences, and how they interact with material incentives. It then characterizes optimal incentive-setting in the presence of norms, deriving in particular appropriately modified versions of Pigou and Ramsey taxation. Incorporating agents' imperfect knowledge of the distribution of preferences opens up to analysis several new questions. The first is social psychologists' practice of "norms-based interventions", namely campaigns and messages that seek to alter people's perceptions of what constitutes "normal" behavior or values among their peers. The model makes clear how such interventions operate, but also how their effectiveness is limited by a credibility problem, particularly when the descriptive and prescriptive norms conflict. The next main question is the expressive role of law. The choices of legislators and other principals naturally reflect their knowledge of societal preferences, and these same "community standards" are also what shapes social judgements and moral sentiments. Setting law thus means both imposing material incentives and sending a message about society's values, and hence about the norms that different behaviors are likely to encounter. The analysis, combining an informed principal with individually signaling agents, makes precise the notion of expressive law, determining in particular when a weakening or a strengthening of incentives is called for. Pushing further this logic, the paper also sheds light on why societies are often resistant to the message of economists, as well as on why they renounce certain policies, such as "cruel and unusual punishments", irrespective of effectiveness considerations, in order to express their being "civilized".

We examine the implications of local externalities in human capital investment for the size and composition of the productive labor force. The model links residential choice, skills acquisition, and production in a city composed of several communities. Peer effects induce self-segregation by occupation, whereas efficiency may require identical communities. Even when some asymmetry is optimal, equilibrium segregation can cause entire 'ghettos" to drop out of the labor force. Underemployment is more extensive. the easier it is for high-skill workers to isolate themselves from others. When perfect segregation is feasible, individual incentives to pursue it are self-defeating, and lead instead to a shutdown of the productive sector.

The ZEP (zones d’éducation prioritaire), which started in 1982, are one French example ofpositive discrimination in the education system. This program aims to improve the students’achievement in the most disadvantaged schools. It gives more financial resources to schoolsin disadvantaged zones and it encourages them to develop specific teaching projects. In thispaper, we estimate the changes in the school characteristics for the ZEP schools. We assesshow much (and which) financial resources were given to the ZEP schools. In 1990, more than10% of students in preschools and in schools from 1rst to 9th grade are in a ZEP zone, and aZEP student receives 5% more resources than a non-ZEP student. This cost is mainlycomposed of bonuses for teachers, and additional teaching hours for the school. Yet theadditional hours increase was very slow since the mean class size decreased by only 0.2student a year, compared to the changes in non-ZEP schools. Then this paper estimates theimpact of the ZEP program on individual achievement, measured here by : success at adiploma ; entry in the 4rth grade ; entry in the 2nd grade ; success at the baccalauréat. We useseveral models to estimate this impact. In order to take account of the endogeneity of the ZEPstatus, we use two methods : difference in difference and instrumental variables. A non-linearmodel is also estimated. The results are the same in all estimations : the impact on studentsuccess of the ZEP program is not significant.

Interest in economic mobility stems largely from its perceived role as an equalizer of opportunities, though not necessarily of outcomes. In this paper we show that this view leads very naturally to a methodology for the measurement of social mobility which has strong parallels with the theory of progressive taxation. We characterize opportunity--equalizing mobility processes, and provide simple criteria to determine when one process is more equalizing than another. We then explain how this mobility ordering relates to social welfare analysis, and how it differs from existing ones. We also extend standard indices of tax progressivity to mobility processes, and illustrate our general methodology on intra- and intergenerational mobility data from the United States and Italy.

This paper studies the effects of progressive income taxes and education finance in a dynamic heterogeneous agent economy. Such redistributive policies entail distortions to labor supply and savings, but also serve as partial substitutes for missing credit and insurance markets. The resulting tradeoffs for growth and efficiency are explored, both theoretically and quantitatively, in a model which yields complete analytical solutions. Progressive education finance always leads to higher income growth than taxes and transfers, but at the cost of lower insurance. Overall efficiency is assessed using a new measure which properly reflects aggregate resources and idiosyncratic risks but, unlike a standard social welfare function, does not reward equality per se. Simulations using empirical parameter estimates show that the efficiency costs and benefits of redistribution are generally of the same order of magnitude, resulting in reasonable values for the optimal rates. Aggregate income and aggregate welfare provide only very crude lower and upper bounds around the true efficiency tradeoff.

This paper studies the interactions between an individual's self esteem and his social environment in the workplace, at school, and in personal relationships. Because a person generally has only imperfect knowledge of his own abilities, people who derive benefits from his performance (parent, spouse, friend, teacher, manager, etc.) have incentives to manipulate his self confidence. We first study situations where an informed principal chooses an incentive structure, such as offering payments or rewards, delegating a task, or giving encouragement. We show that extrinsic rewards may have hidden costs as stressed by psychologists in that they undermine intrinsic motivation. As a result, they may be only weak reinforcers in the short run, and become negative reinforcers once withdrawn. Similarly, empowerment is likely to increase motivation, while offers of help may create a dependance. More generally, we identify when the hidden costs of rewards are a myth or a reality. We next consider situations where people criticize or downplay the performance of their spouse, child, colleague, or subordinate. We formalize ego bashing as reflecting battles for dominance or authority within the relationship. Finally, we turn to the self presentation strategies of privately informed agents. We study in particular how depressed individuals may engage in self-deprecation as a way of seeking leniency (a lowering of expectancies) or a helping hand' on various obligations.

This paper aims to explain the significant variations in the social contract observed across nations. It shows how countries with similar technologies and preferences, as well as equally democratic political systems, can sustain very different average and marginal tax rates. Similarly, it provides an explanation for the striking difference between the US and European systems of education finance or health insurance. The underlying mechanism operates as follows. With imperfect credit and insurance markets some redistributive policies can have a positive effect on aggregate output, growth, or more generally ex-ante welfare. Examples considered here include social insurance, progressive taxation combined with investment subsidies, and public education. Aggregate efficiency gains imply very different political economy consequences from those of standard models: the extent of political support for such redistributive policies decreases with the degree of inequality, at least over some range. This can generate a negative correlation between inequality and growth, as found in the data, without the usual feature that transfers increase with inequality, which is not supported empirically. Moreover, capital market imperfections make future earning a function of current resources. Combined with the politics of redistribution this creates the potential for multiple steady-states, with mutually reinforcing high inequality and low redistribution, or vice-versa. Temporary shocks to the distribution of income or the political system can then have permanent effects.

This paper develops a simple model of human capital accumulation and community formation by heterogeneous families, which provides an integrated framework for analyzing the local determinants of inequality and growth. Five main conclusions emerge. First, minor differences in education technologies, preferences, or wealth can lead to a high degree of stratification. Imperfect capital markets are not necessary, but will compound these other sources. Second, stratification makes inequality in education and income more persistent across generations. Whether or not the same is true of inequality in total wealth depends on the ability of the rich to appropriate the rents created by their secession. Third, the polarization of urban areas resulting from individual residential decisions can be quite inefficient, both from the point of view of aggregate growth and in the Pareto sense, especially in the long run. Fourth, when state-wide equalization of school expenditures is insufficient to reduce stratification, it may improve educational achievement in poor communities much less than it lowers it in richer communities; thus average academic performance and income growth both fall. Yet it may still be possible for education policy to improve both equity and efficiency. Fifth, because of the cumulative nature of the stratification process, it is likely to be much harder to reverse once it has run its course than to arrest it at an early stage.

We analyze the effect of inflation on the average output of monopolistic firms facing a small fixed cost of changing nominal prices. Using Taylor expansions, we derive a general closed-form solution for the slope of the long-run Phillips curve. This very simple, unifying formula allows us to evaluate and clarify the role of three key factors: the asymmetry of the profit function, the convexity of the demand function, and the discount rate. These partial equilibrium effects remain important components of any general equilibrium model with (s,S) pricing.

Aggregate cost uncertainty, arising from real shocks or unanticipated inflation, reduces the informativeness of prices by scrambling relative and aggregate variations. But when agents can acquire additional information, such increased noise may in fact lead them to become better informed, and price competition will intensify. We examine these issues in a model of search with learning, where consumers search optimally from an unknown price distribution while firms price optimally given consumers' search rules. We show that the decisive factor in whether inflation variability increases or reduces the incentive to search, and thereby market efficiency, is the size of informational costs.