Social norms and moral hazard

We examine the impact of social rewards in an unemployment insurance context. A social norm requires effort in proportion to perceived talent, but individuals cunningly choose effort so as to manipulate the perception of their talent. The model predicts that low talented individuals increase effort in response to more generous unemployment insurance. The welfare consequences of the social rewards are ambiguous. Social rewards boost effort, but for individuals with low talent more than any real economic concern can justify. Moreover, the distribution of social respect is slanted in favour of the more talented.