Journal of Economic Behavior Organization Vol. 44 2001 249–267
The effects of community characteristics on community social behavior
Nancy Brooks
∗
Department of Economics, University of Vermont, 231 Old Mill, PO Box 54160, Burlington, VT 05405-4160, USA
Received 9 November 1998; received in revised form 15 September 1999; accepted 29 September 1999
Abstract
The purpose of this paper is to examine the impact of a community’s economic characteristics on its ability to generate adherence to socially efficient norms. These norms prescribe a behavior
for an individual when hisher preferred behavior imposes a negative externality on others. This paper explores social norms as a mechanism of how neighborhood characteristics can affect in-
dividual behavior. Understanding the mechanism through which community characteristics affect individual behavior is important in that it enables the development of a testable structural empirical
model which is purged of the omitted variable bias arising from the potential endogeneity of the neighborhood choice. © 2001 Elsevier Science B.V. All rights reserved.
JEL classification: D71 Keywords: Analysis of collective decision making; Social choice; Clubs; Committees
1. Introduction
The causes of behavior patterns found in poor, socially isolated urban areas are a widely discussed and studied topic. In most US cities large segments of the poor are physically and
socially isolated. William Julius Wilson opens his 1987 book, The Truly Disadvantaged by noting that “in the mid-1960s urban analysts began to speak of a new dimension to the
urban crisis in the form of a large sub-population of low-income families and individuals whose behavior contrasted sharply with the behavior of the general population”.
1
Research on the urban poor has so far been mainly the domain of sociologists and social historians e.g. Katz, 1993; Wilson, 1987; Jencks and Peterson, 1991. Economists’ research
∗
Tel.: 802-656-0946. E-mail address: nbrookszoo.uvm.edu N. Brooks.
1
See Wilson 1987, p. 3. 0167-268101 – see front matter © 2001 Elsevier Science B.V. All rights reserved.
PII: S 0 1 6 7 - 2 6 8 1 0 0 0 0 1 4 0 - 2
250 N. Brooks J. of Economic Behavior Org. 44 2001 249–267
on behavior patterns has thus far mainly emphasized the relationship between changes in policy variables, such as income transfers and in-kind benefits, on changes in individual
behavior. Some empirical work has been done that investigates the relationship between neighborhood macro variables and behavior patterns, such as testing the effect of living in a
poor neighborhood on dropping out of school or teenage childbearing. Case and Katz 1991 find that the behaviors of neighborhood peers appear to substantially affect youth behaviors
in a manner suggestive of contagion models. Similarly Crane 1991 finds evidence in favor of an epidemic theory from empirical work investigating teenage child bearing and dropping
out. On the other hand Evans et al. 1992 find that when you account for the endogeneity of the peer group, the peer group effect disappears. Plotnick and Hoffman 1993, in work
using sister pairs in the panel study of income dynamics to control for unobservable family characteristics, also conclude that researchers should be skeptical of findings of significant
neighborhood effects in models that do not account for the endogeneity of the neighborhood. Jencks and Meyer 1990 summarized the empirical literature on neighborhood effects up
to 1990 and came to the conclusion that there is no general pattern of neighborhood effects. Manski 1993 has pointed out that many of these empirical tests are flawed in that they are
not able to identify whether the neighborhood is really influencing the individual or merely reflecting the average characteristics of the community. He, in fact, coined the phrase the
“reflection problem” to describe this empirical problem of identifying endogenous social effects from observations of the distribution of behavior in a population. This is an important
problem for many reasons, in particular, in terms of policy, the existence of neighborhood effects can imply potential efficiency gains from redistributive policies that address the
source of the externality. Manski states in his paper that the only way to improve the prospects for the identification of endogenous social effects are to develop new data sources or develop
tighter theory. We pursue the latter avenue. To solve this “reflection problem” it is important first to understand the underlying mechanisms of how neighborhood characteristics affect
individual behavior.
2
The mechanism that is explored in this paper is one that involves the relationship between community characteristics, particularly the neighborhood’s income distribution or more
specifically the distribution of returns associated with participating in the “mainstream” economy and the ability of a community to generate adherence to socially efficient norms.
The norms that will be considered in this paper prescribe a behavior for an individual when hisher behavior could impose a negative externality on the rest of the community. The
simplest example is a norm that would prescribe cooperation in a prisoner’s dilemma sit- uation. When the individual return from a particular opportunistic choice of behavior, like
theft, is less than the cost that it imposes on others, then it might be socially efficient for a norm to be prescribed which ameliorates the costly behavior. A norm will be desirable
in cases when an individual’s action imposes a externality on a group of others, and it is not possible to set up markets to exchange the “right of control” Coleman, 1990 easily.
Coase 1960 shows that norms would not be necessary to have efficiency in the absence of transaction costs if markets in the “right of control” exist. In general, though, for many
actions it would be difficult if not impossible to set up these markets, consequently com- munities have an incentive to develop norms, norms that are prescribed to prevent behavior
2
Aside from Montgomery 1990, 1991, 1994 little work has been done in this area.
N. Brooks J. of Economic Behavior Org. 44 2001 249–267 251
that is socially costly for the community.
3
This paper develops a theoretical model of how community characteristics affect adherence to these socially efficient norms. The model is
then empirically tested. Individuals have many interactions in their day-to-day lives in which there are opportuni-
ties to get short term immediate gains. Ullmann-Margalit 1977 analyzes Hobbes’ original situation of mankind as a version of a prisoner’s dilemma. Hobbes states that “For he that
should be modest, and tractable, and perform all his promises, in such time and place, where no man else should do so, should make himself a prey to others and procure his own certain
ruin”.
4
Societies can potentially gain by having social institutions or norms which can limit the opportunistic behavior and thus enable more cooperative behavior.
When individuals have repeated interactions with the same people, the folk theorem states that behavior that is not opportunistic can be supported as a subgame perfect equilibrium
if the two players are sufficiently patient and the encounters are infinite Fudenberg and Maskin, 1986. Strategies such as tit-for-tat have been shown in simulations to be very effec-
tive in increasing cooperation in repeated two person prisoner’s dilemma games Axelrod, 1986. When, though, as in many community interactions, meeting the same person occurs
infrequently or not at all, it is more difficult to limit opportunistic behavior. This is because there are very limited opportunities or incentives for the “victim” to sanction or retaliate in
any way that might make the opportunistic individual reconsider hisher actions.
Social norms which prescribe that if someone is opportunistic they lose not only the returns from interacting in the future with the person they harmed but with a whole set
of people, can potentially limit opportunistic behavior.
5
Third party sanctions may allow behavior to be supported as an equilibrium that could not be supported with only personal
enforcement. The question then to ask is: When can third party sanctioning be supported in equilibrium? In a situation where two communities have a similar norm why might it be
true that one community is able to enforce the norm and another community is not? The explanation developed in this paper is that the relative costs and benefits of enforcing norms
differ among communities. It is costly for individuals to engage in third party sanctioning since sanctioning is a public good with private costs.
6
The overall costs and benefits of sanctioning vary in different communities because of differences in the individual’s and the
community’s returns to cooperative behavior. In this model, individuals are randomly matched with different partners to play an infinite
sequence of prisoner’s dilemma games. These games are meant to represent a sequence of social interactions with various acquaintances. Consider the following simple story to get a
3
Coleman 1990 refers to norms of this type as essential norms, and Ullmann-Margalit 1977 calls them prisoner’s dilemma norms. These are different from norms of convention or coordination which are typically
modeled as the equilibria of coordination games as opposed to prisoner’s dilemma games see, e.g., Young, 1993, 1998; Jones, 1984. Examples of conventional norms include driving on the left-hand side of the road verses the
right or using IBM computers instead of Apples.
4
See Hobbes 1948, p. 103.
5
Examples of community sanctions could include being stigmatized by the community or suffering a reputation loss.
6
Some recent papers on social norms see Lindbeck et al., 1999; Bernheim, 1994 have assumed, less realistically, that there are no costs to the third party sanctioners who are stigmatizing or censuring individuals deviating from
the community norm.
252 N. Brooks J. of Economic Behavior Org. 44 2001 249–267
flavor for the model. In community life we have interactions with many types of people, in this story for tractability we will just consider two types. Two randomly matched individuals
are making a commercial transaction in a shop. One individual is a customer and the other is the shopkeeper. Each individual has a different return to cooperating honest trading in
this example. You would expect that the more successful shopkeepers would have a higher profit margin and the smarter customers, who are able to extract the greatest gains from trade,
are also the ones who receive the highest income from cooperative trade. Consequently, the gains to trade are assumed to be positively correlated with income. The match works in the
following way. Each period half of the population are customers. A customer realizes he needs to buy something which determines the shopkeeper with whom he is matched. When
the customer and the shopkeeper meet they must each decide how to do business with the other. They can be trustworthy and honest in the transaction; they can deviate or they can
refuse to transact business at all this form of sanctioning will be referred to as ostracism in the model. For the shopkeeper to be deviant may mean selling a lower quality product
than advertised. For the customer to be deviant may mean shoplifting. For the shopkeeper to ostracize may mean refusing to sell to someone; and for the customer to ostracize may mean
boycotting.
7
The shopkeepers and customers consider the costs and benefits to deviating when there is a possibility that they can be sanctioned in the future. In this model then,
the lower a person’s income the greater hisher net gain from deviating from a norm that would potentially sanction hisher from mainstream activities. In another example, a jobless
individual would have less to lose from shoplifting than someone who had a job they could lose if they were found to be a shoplifter or vandal. To be ostracized from neighborhood
social events because you associate with, instead of sanctioning, the community crooks may be more costly if you are a college graduate hoping to use neighborhood connections
to network for a well-paying job than if you are a high school drop-out. In this model, it is shown how a community with a lower income distribution can have more individuals
who will choose to deviate. Additionally, as more people are deviating from the prescribed behavior, it becomes more costly for others to sanction, since each sanction is costly. Fewer
individuals will then choose to sanction. It is shown that the incentives to follow the norm by both not being opportunistic and by being a third party sanctioner depend not only on the
economic characteristics of the individuals themselves, but on the economic characteristics of the other community members.
8
This model illustrates one view of why it might be difficult to support particular norms in poor communities. This view is that there are neighborhood effects. The decision to follow
a norm depends on the costs and benefits of sanctioning, which are a function of not only the individual’s economic characteristics but the characteristics of the community. In poor
communities some individuals, particularly the poorest, may not find it in their interest to sanction under any circumstance because the cost is too high but there may be others in the
community who would have sanctioned if pressured. There is an externality in that if an
7
See Milgrom et al. 1990 for a similar story from an historical example in which a system of medieval judges was able to successfully encourage merchants to behave honestly, impose sanctions on violators, become informed
about others behavior, and to pay imposed penalties.
8
Since third party sanctioning is generally costly, individuals would like to free ride and let others do the sanctioning while they enjoy the benefits. This situation has been termed the second-order free rider problem
Oliver, 1980.
N. Brooks J. of Economic Behavior Org. 44 2001 249–267 253
individual who sanctions leaves the community not only are they not there to sanction but they will cause others to stop sanctioning since the percentage of sanctioners, and thus the
potential costliness of not sanctioning, has decreased. Another view of why some communities might find it difficult to support a particular norm
is that there is sorting Tiebout, 1956. Individuals who behave in a particular way may also have other similar characteristics or tastes that make them tend to agglomerate together. The
two views have different policy implications
9
and one purpose of the theoretical model is to see if it is possible to distinguish between the two views when examining the data.
Sociologists have typically been interested in how individual behavior is determined by group norms and other informal methods of social control. Economists have typically
shown little interest in norms probably because “homo economicus” would ignore norms unless they were consistent with utility maximizing. Coleman 1990 points out, though,
that social norms can result from the purposive actions of rational individuals Frank, 1992. Economists, in fact, may have much to offer in terms of developing a structure to better
understand social norms, which have been focal points for qualitative sociological research for years. Game theory in particular has much to offer in terms of developing this structure,
e.g., the norms we are examining in this paper arise to deal with social interactions that have a prisoner’s dilemma structure. Okuno-Fujiwara and Postlewaite 1995 and Kandori
1992 are important papers in the game theoretic modeling of prisoner’s dilemma norms. In particular, Okuno-Fujiwara and Postlewaite 1995 lay much of the foundation for this
paper.
Okuno-Fujiwara and Postlewaite 1995 develop a model of how social norms and social standards of behavior influence individuals’ decisions. This paper builds on their work to
develop a theoretical and empirical understanding of how community characteristics affect the equilibrium level of deviance and sanctioning in a community.
The three main theoretical results of the paper are that increasing the average return to “mainstream” behavior in the community non-linearly decreases the percentage of “deviants”
in the community; decreasing the variance of returns to “mainstream” behavior in the com- munity also non-linearly reduces deviance. Finally, if the upper bound on the distribution
of these returns for the community is below some threshold value then there is stable equi- librium where all individuals will want to be “deviant”. Additionally and perhaps most
importantly, by developing an explicit model of how community characteristics affect in- dividual behavior it is possible to do an empirical estimation that tests the model purged
of the selection problems that arise from the endogeneity of the neighborhood choice, thus helping us to move beyond the “reflection problem”.
The remainder of this paper is organized into the following sections. The model will be presented in Section 2. The equilibrium condition given a community norm is defined
and discussed in Section 3. The comparative statics results, which illustrate the effects of changes in the average income distribution and changes in the variance of the income
distribution on the equilibrium level of deviant behavior in the community, are derived in
9
The Tiebout model suggests that individuals efficiently sort themselves into neighborhoods. The neighborhood effects model instead suggests that there can be negative externalities associated with the economic composition
of the community and thus there may be potential efficiency gains to certain types of redistributive policies which address the externality.
254 N. Brooks J. of Economic Behavior Org. 44 2001 249–267
Section 4. A brief discussion of the theoretical results and the policy implications is given in Section 5. The procedure for empirically testing the model is discussed in Section 6 along
with a discussion of the difficulties in empirically testing for neighborhood effects. The data are described and the results of the estimation are evaluated in Section 7. A discussion of
the empirical results and the conclusion is given in Section 8.
2. Model
