Jean Tirole gave a paper on “Laws and Norms” as his Schwartz Lecture last week. He has been working on psychology and economics for many years with Roland Benabou. The presentation was an extension of that work. Consider a game where a costly action generates a positive externality. Agents are motivated to take such an action by a monetary reward and a private value from the action. However, they also care what others think of them. How can we think about this formally and what implications does it have for contributions to the public good?

Tirole’s (and Benabou’s) first contribution is to provide a simple, tractable model of this psychological effect. Each agent’s payoff is a function of others’ expectation of his private value given his action and monetary reward. Hence if you contributed to the public good but received no monetary reward, the expectation is different that if you contributed and got paid. From this simple formulation much can be deduced. If a contribution is elicited via a monetary reward, it carries less positive information about the contributor than one when there was no monetary reward. There might be a bigger contribution if there is no monetary reward. The less observable the contribution, the smaller is the incentive to make it etc.

The contribution was twofold. First, the mathematical modeling of the psychological effect requires some art and effort. Second, the model is intuitive and simple enough that others can use it to express their own ideas. One of my colleagues is thinking about two papers based on the basic Tirole model.

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