Social norms and illicit behavior: an evolutionary model of compliance

Economists have viewed the presence of externalities and other market failures as leading to a private equilibrium that would not be Pareto optimal. In the exploitation of common-pool resources, especially biological resources, this would lead to the much-discussed 'tragedy of the commons'. A challenge to this traditional view has emerged from a careful study of the theory and practice of the exploitation of common-pool resources. The existence of a social norm may provide an individual with information on the extent of external costs associated with a behavior, and thus provides an imperfect means of internalizing the external costs. In this paper we propose an evolutionary model of compliance that allows for the existence of a social norm. The impact of the social norm on public policy towards externalities is examined.