Dynamic policy in the presence of social norms

Abstract

Individual actions can depend on prevailing social norms. We investigate how optimal policy to promote pro-social action should exploit the underlying social dynamics. We develop a dynamic model of prosocial action in which conformist consumers repeatedly choose whether to engage in some prosocial activity. Whereas individual behavior is not observed, the overall participation rate in the previous period is common knowledge. We demonstrate how conformity can lead to multiple steady states and how their selection depends on starting conditions and discount factors. We further show that the optimal subsidy path can be non-monotonic and can decrease before reaching the steady state-level. Our model thus provides a rationale for introductory subsidies to promote environmentally friendly behavior from a behavioral perspective.