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The signaling theory of cooperation and social norms can be used to under-stand and criticize a variety of laws. But one must acknowledge two problems with the theory. The first is that of testability; the second problem is that of underinclusiveness.

Testability. Because signaling models produce multiple equilibriums, it is difficult to use them to generate testable predictions. The number of equilib-riums can be reduced by making strong assumptions about what consti-tutes rational behavior, but these assumptions are controversial, and empirical tests—which are now really joint tests of the model and of the rationality as-sumptions—are hard to devise and their results are hard to interpret.

Nevertheless, hypotheses derived from the signaling model will be examined informally in light of common intuitions and data. Because the intuitions and data are presented casually, it will be useful here to discuss how one would more formally test the theories. The common theme among the theories is that good types—people with low discount rates—are more likely to conform to social norms than bad types are. To test this proposition, we need to have (1) a measure for discount rates and (2) a measure for conformity to social norms.

The independent variable is discount rate. A person’s preference for payoffs sooner rather than later cannot be directly observed, so one must rely on a proxy to measure discount rates. Economists have used the following proxies for a high discount rate in order to test the relationship between discount rate, criminal behavior, and addiction: not having a savings account; smoking;

having sex without contraception; being at a young age when one first

smoked, drank or had sex (Glaeser 1998, p. 3); being poor; being less edu-cated; and being younger (Becker and Mulligan 1997). Because studies have found associations between high discount rate, crime, and addiction (Glaeser 1998, Becker, Grossman, and Murphy 1991), one can add criminal behavior and addiction as proxies. So one predicts that people with all or many of these characteristics—call them “bad-type characteristics”—are less likely to con-form to social norms than people without them.

There are complications. A monk might take a vow of poverty but have no problem deferring gratification. A member of a criminal gang might com-mit crimes to show his loyalty to the gang, not because he has trouble restrain-ing his impulses. An adequate empirical test would have to control for these possibilities.

The dependent variable will be a measure of conformity to social norms.

Conformity to social norms means signaling. So one predicts that people with bad-type characteristics will engage in less signaling than people without these characteristics, holding everything else equal. The trick is holding everything else equal.

The problem is that what might emerge as a conventional signal in any group is to a certain extent arbitrary. Any action will serve the purpose, and multiple actions will serve the purpose, as long as they have the right cost structure, and cost itself does not provide much of a constraint because one can control the cost of many actions (for example, gifts can be more or less ex-pensive). So in one community people might signal by voting, wearing formal dress, praising the government, going to church, and inviting each other out to dinner, while in another community people signal by attending political protests rather than voting, wearing nose rings, condemning the government, smoking, and helping the poor. Indeed, the two communities might be in the same location, the signals of one community might be reactions to the signals of the other community, and there may even be some overlap in member-ship. So one cannot make the straightforward prediction that people with bad-type characteristics are less likely to vote; good types in the second com-munity do not vote because voting is not recognized as a signal. Instead, one must hold community membership constant; then one can predict, for exam-ple, that a person in the first community who has bad-type characteristics will vote less often than a person in the first community who does not have those characteristics.

Further complicating matters, a deviant subgroup might adopt signals that are self-consciously in opposition to the signals used by the majority.

Smoking, committing crimes, and other actions that violate the norms of the majority are often used to bind members of the subgroup. In the majority, a

person suppresses a desire to smoke or drink in order to signal that he belongs to the good type. Those who have no taste for cigarettes or alcohol are lucky.

They benefit from the crudeness of signals, the inevitability of error. In the subgroup, a person suppresses a desire (or moral commitment) not to smoke or drink in order to signal that he belongs to the good type. An astute ob-server can distinguish behaviors that are signals and similar behaviors that sat-isfy intrinsic preferences. Signaling behavior is more ritualized or stylized, be-cause the person sending the signal wants others to know that his behavior is not simply the indulgence of a taste, and one way to convey this information is to engage in stereotyped behavior rather than idiosyncratic behavior. An ex-ample is the difference between social drinking and alcoholism; another is the difference between wearing old pants and wearing new pants that have been manufactured to look old. But these subtle differences, though intuitively un-derstood by everyone, do not usually appear in the data used by the social scientist.

Underinclusiveness. The cooperation theory holds that people will always follow their intrinsic preferences when they are not observed by people who have an incentive to impose sanctions. But this prediction is generally re-garded to be false. People appear to act against interest when there is no pen-alty. Examples include tipping waiters in restaurants to which one never ex-pects to return, stopping at red lights when no one is around, returning wallets found on the street, rescuing strangers from danger, and accepting or rejecting offers on the basis of the fairness of the offer (Thaler 1991). Experi-mental work suggests that people sometimes cooperate in prisoner’s dilemmas and similar games in which cooperation is not an equilibrium outcome (Kagel and Roth 1995).

These problems are occasionally said to undermine rational choice theory, but a more accurate assessment is that rational choice theory can be used to explain some social phenomena but not other social phenomena. It is not clear where the line should be drawn, and it seems unlikely that one can say in the abstract when the theory runs out. Many theories based on rational choice cannot explain important behaviors or do so only by making strong assump-tions that render the theory tautologous. But the methodology itself does not fail until it becomes clear that better methodologies are forthcoming. Rational choice theory has some successes, and these successes make it attractive com-pared to its competitors.

What are these competitors? Sociology seeks patterns in social organization that transcend the actions of individuals. Theories derived from cognitive and social psychology locate the source of behavioral regularities in the structure of the brain or the influence of upbringing. These disciplines have produced

many interesting results that pose a challenge to rational choice theory, and they have attracted the interest of many law professors. But they have not yet entered the mainstream of legal scholarship. Perhaps they will in the future, but I will leave that to others.

Many rational choice theorists see a third way to address the theory’s problems: maintain the general framework of rational choice theory, espe-cially its commitment to methodological individualism, but relax some of its less realistic assumptions. The following sections describe a few of the result-ing theories.

Altruism

Altruism can explain cooperation across a range of contexts. The patron tips the waiter in the strange restaurant because the patron cares about the waiter’s well-being. A person refrains from littering on the beach because he cares about the feelings of the other bathers. The taxpayer reports all of his in-come because he cares about the welfare of his fellow citizens. Cooperation in prisoner’s dilemma experiments results from players’ desires to benefit each other.

Critics argue that the use of altruism in rational choice arguments is tautol-ogous. This is not true; or, more precisely, whether it is true or not de-pends on how altruism is used in the argument. Take the examples above.

Some patrons tip waiters and other apparently identical patrons do not. If the theory assumes that everyone feels altruism toward waiters, then the theory is falsified; if the theory assumes that some people feel altruism toward waiters and some do not, then the theory verges on tautology. A popular theory for why people donate money to charities is that they feel altruism. But this the-ory is inconsistent with the fact that people do not always reduce their gifts when the charity receives more money from other sources (Sugden 1982).

The theory is also inconsistent with the fact that the size of a gift varies with the amount of publicity given to the gift. More examples will be discussed in Chapter 4. The problem with the theory that altruism explains philanthropy is not that it is tautologous, but that it is false.

The problem, I should stress, is not that altruism does not exist. There are persuasive reasons for believing that altruism exists among kin and even mem-bers of social groups.¹But altruism cannot account for collective action as it is usually observed. Altruism cannot account for norm-driven behavioral regu-larities. For example, it cannot explain the fact that gifts are routinely ex-changed on holidays and special occasions, not whenever a transfer would maximize the utility of the donee as filtered through the donor’s utility

func-tion; or that people give waiters tips of 15 to 20 percent rather than an amount that varies with their altruistic feelings. The proper theoretical ap-proach is not to give altruism any particular explanatory weight in a theory of cooperation, but to treat it as a taste like any other, which gives rise to its own collective action problems that need solution.²

Status and Conformity

Another form of interdependent utility is discussed under the labels “status”

and “conformity.” A person might derive utility from having more wealth, or more of some kind of good, than other people. The possession of goods, or at least of certain status goods, that others do not have confers status on the owner. Or a person might lose utility from having different goods from the goods possessed by everyone else. The failure to be in the same position as others confers disutility. If people care about status, they will be trapped in a prisoner’s dilemma, as they overconsume in an effort not to lose ground to others. If people care about conformity, they overconsume or underconsume in an effort to consume what everyone else is consuming.³As an example of the problems created by status-seeking, suppose everyone in a community owns a safe car, which is the kind of car that everyone prefers. But people also care about status, and one person buys a fancy but unsafe car because he de-rives utility from his possession of a car that is more expensive than the cars owned by others. This action confers disutility on the others, so they trade in their safe cars and buy the fancy car. But if everyone has the identical fancy car, no one has status by virtue of owning a car that is fancier than the cars owned by everyone else. The result is that everyone is worse off because they have unsafe cars while being unable to satisfy their taste for status. Frank (1985) explains the deviation of wages from marginal productivity as the re-sult of high-productive workers paying off low-productive workers to accept their lower status in the hierarchy. Bernheim (1994) shows how a concern for status can cause behavioral regularities (and see McAdams 1995, 1997).

Akerlof (1997) pursues similar themes under the rubric of “social distance.”

Relying on strong assumptions about people’s utility functions is risky, be-cause it limits the explanatory power of a theory. Status theories cannot ex-plain why some people seek status and others do not. The cooperation model holds that status is not intrinsically important, but is a label assigned to peo-ple who are believed to possess characteristics that others seek in cooperative partners. When I say that people seek status, I mean that they seek the cluster of goods, characteristics, and accomplishments that will make others think that they have very desirable qualities. This theory has testable implications, discussed in Chapter 4.

Herd Behavior

Behavioral regularities can arise in the absence of reputational effects and in the absence of interdependent utility functions. They arise, for example, when people make inferences about the value of options from other people’s actions, a phenomenon that may lead to “herd behavior.” Suppose that every-one lines up to enter a fashionable restaurant while ignoring the equally good restaurant across the street. A reputational explanation suggests that people go to the fashionable restaurant in order to show that they are good types. An ex-planation that rests on interdependent utility assumes that people enjoy pa-tronizing restaurants that other people patronize, but it does not explain why this would be so. The herd behavior explanation holds that people have only partial information about the quality of restaurants, and imitate other people in the expectation that inferences based on other people acting on their partial information reflect aggregation of information about the quality of restau-rants. Thus the social norm—the behavioral regularity of patronizing a cer-tain restaurant—arises as a result of people’s incentives to avoid bad outcomes that would occur if they relied on their own partial information (Banerjee 1992; Bikchandani, Hirshleifer, and Welch 1992).

The herd behavior model is similar to the reputation model. Both models assume stripped-down preferences, and derive the incentive to conform from agents’ partial information. The main difference is in interpretation. Under the reputation model people engage in behavioral regularities because they have limited information about the tastes of others. Under the herd behavior model people engage in behavior regularities because they have limited infor-mation about the value of goods or services. The reputation model seems to provide a truer explanation for social norms as they are commonly under-stood. One thinks that people conform to social norms because they care about their reputation or fear sanctions. But one does not sanction people who make poor decisions, based on insufficient information, if those deci-sions do not injure one.

Still, the distinction between behavioral regularities caused by herd behav-ior and behavbehav-ioral regularities caused by reputational concerns is not always clear. Herd behavior models are sometimes used to analyze fashion, whose characteristic volatility can be derived from imitative behavior. So it may seem that social norms and norms of fashion are different phenomena. But intuitions are complex and generalization is hazardous. Are high heels or ties required by social norms, or are they mere fashion? Rather than debating semantics, I hold that any behavior regularity that results from partial infor-mation—either about the value of some activity or about the character of people who engage in it—is described by a social norm, whereas behavioral

regularities that arise because of coincidences in tastes, technologies, and budget constraints (such as wearing warm clothes on a cold day), or because of institutional competition (such as market prices) are mere behavioral regularities.

Emotions

Frank (1988) notes that most people have only limited control over certain physiological traits, and most people can, most of the time, correctly interpret people’s physiological traits. For example, most people blush when they lie (at least to someone they sympathize with), and most people will interpret the blush to mean that the speaker is lying or is up to no good. Now, if one has the power to control one’s physiological traits, one might as well deceive peo-ple; one might have a promising career as a con artist or lawyer. Nature pro-vides lots of examples of such deviants in evolutionary games. But deviance by some players is a stable strategy only if most players do not defect.

At first sight Frank’s theory seems to add to rational choice theory the as-sumption that people have a “preference” to cooperate, but his theory is more interesting than that. People cooperate rationally in response to the fact that their body gives them away if they have bad motives. Having such physiologi-cal traits, moreover, confers an advantage, because people who cannot violate commitments, or who cannot do so without giving advance warning, are good cooperative partners, so they will be sought out by others for coopera-tive ventures. One can thus tell an evolutionary story about why in equilib-rium many people will have such physiological traits.

Frank argues that his theory explains both the intra-group cooperative behavior that concerned us in Chapter 2 and the relations between strang-ers. The first claim is plausible, but it has little methodological payoff. I do not break a promise because (1) if I break a promise, the victim and others in my group will henceforth avoid me; and (2) my body will give me away before I break my promise, allowing the victim to take precau-tions that reduce my payoff from cheating. Given our assumption that a sufficiently dense network of communication exists, the two theories have exactly the same implications. Applying Occam’s razor, however, one prefers the first.

Frank’s theory has more promise for extra-group cooperative behavior. Sup-pose I enter a store with the intention of shoplifting. But my heart pounds, my temples throb, and sweat drips down my forehead. The proprietor notices my suspicious behavior and observes me carefully, and accordingly I refrain from shoplifting.

But is this why people tip waiters? Frank does not claim that the customer

feels an emotional bond to the waiter after the delightful service, and so can-not bring himself to “cheat” on the relationship. Nor does it seem plausible to say that the customer with bad intentions would blush or otherwise reveal himself as he sat down, so the waiter would discover in advance that this per-son is a bad type and will not tip him, and so would give him the bad service he deserves.

In fact, Frank’s argument is different. Frank suggests that most people tip the waiter in the strange restaurant in order to practice being honest.

In fact, Frank’s argument is different. Frank suggests that most people tip the waiter in the strange restaurant in order to practice being honest.