1 Introduction
Human behavior seems to be influenced both by economic incentives and social norms. While
economists have largely emphasized economic incentives, social norms have been largely ne-
glected although this is a major topic in other social sciences like sociology (Ellickson 1998,
Elster 1989, Posner 1997). It is only recently that some economists have analyzed the eco-
nomic consequences of social norms and status seeking in societies (see e.g. Akerlof 1980 for
a seminal paper and more recently Lindbeck et al. 1999). The basic idea is that individuals
when considering decisions not only take into account the private economic incentives (for
example, the expected penalty when being non compliant with respect to an environmental
standard) but also the intensity of social norms against certain actions. In other words,
individual decisions can be influenced by the aggregate behavior observed in the population.
Recently, Lai et al. (2003) have suggested that the presence of social norms may explain
why one observes that a surprisingly large number of firms comply with pollution standards
even though expected penalties for non compliance are low (see Russell, Harrington and
Vaughan, 1986, for evidence in the US and Livernois and McKenna, 1999, for the Canadian
case). Cropper and Oates (1992) suggest that “perhaps public opprobrium is a stronger
disciplinary force than economists are typically inclined to believe”. Hatcher et al. (2000)
have empirically explored social norms in the context of compliance in fisheries. Various
papers have analyzed the role of non-economic motivations for being compliant with pollution
standards: both Bontems and Rotillon (2000) and Heyes (2001) assume the existence of an
exogenous proportion of firms that always comply and show that increasing this proportion
may have adverse impacts on welfare.
The purpose of the paper proposed here is to theoretically explore the implications of
social norms in deterring pollution standard fraud along with economic incentives. The
model assumes that a large number of risk-averse individuals differ not only in their private
cost of compliance with the environmental standard but also in their individual aversion to