CIRJE-F-169 "The Erosion and Sustainability of Norms and Morale"
Author Name Kandori, Michihiro
Date September 2002
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Remarks Subsequently published in The Japanese Economic Review, 2003, vol.54, no.1, pp.29-48

The initially high performance of a socioeconomic organization is quite often subject to gradual erosion over time. We present a simple model which captures such a phenomenon. We assume that players are partly motivated by certain psychological factors, norms and morale, and they are willing to exert extra effort if others do so. This results in a "continuum" of equilibrium effort levels, whose minimum corresponds to the Nash equilibrium with respect to the material incentives. We show that repeated random shocks induce the erosion of equilibrium e ort levels, but they do not completely decay; in the long run a certain range of efforts are sustainable. Our model shows that different organizations typically enjoy diverse norms and morale, which persist for a long time, in the vicinity of the equilibrium determined by material incentives.