Introduction

Social reward mechanisms are often used to resolve externality problems and to induce cooperation. Such mechanisms can be effective only if people care about social status: that is, they care about what other people think about them. It may be argued that caring about the opinion of others is wired into all human beings and characterizes us as “social animals.” This observation led many researchers to extend individual preferences beyond pure selfishness, adding considerations such as altruism, social status, and peer effects, and to examine the economic and social implications of such extended preferences. However, we cannot expect all individuals to care equally about the opinion of others. Some individuals may be more motivated by economic considerations (money), others by social considerations (status). The relative importance that the “average” person gives to these two considerations is a subject of debate between economists and sociologists. We would like to contribute to this debate by examining the question whether preferences that put substantial weight on “what other people think” can survive under the forces of economic competition.

The purpose of this chapter is to characterize the circumstances under which socially minded preferences survive in the long run.