Social Norms and Moral Hazard

The probability of income loss depends on talent and effort. Effort has positive externalities and therefore individuals are proportion to their perceived diligence. The social norm requires more effort from individuals perceived as more talented, but talent is private information and individuals cunningly choose effort so as to manipulate the public perception of their talent. We analyze the workings of a social insurance system in this setting. It turns out that social norms may mitigate moral hazard. However, the distribution of social status in society will not be uniform.