The Theory of Social Custom: A Modification and Some Extensions

Abstract

Can unprofitable social customs persist? Can they account for important economic phenomena? Akerlof's original model of social custom suffers from two defects: First, sanctions for violating the custom depend discontinuously on the size of the violation, and second, the model borders on the unmanageable. This paper shows that customs can persist and can lead to such phenomena as involuntary unemployment when sanctions are continuous. More important, the continuity assumption simplifies the model dramatically, making the analysis of social customs tractable. The simplified model is used to extend Akerlof's analysis of a “just wage” to cases in which workers are heterogeneous.