Social rewards, externalities and stable preferences

Abstract

This paper examines the role of social rewards as a corrective mechanism for activities which generate externalities. The focus of this paper is on the circumstances under which social rewards provide effective and feasible incentive mechanism that may replace laws and regulations. In particular, social mechanism is effective only in a society in which individuals who care about their standing in the society can survive in the long run. We show that the nature of economic interaction between matched players influences whether the socially minded individuals survive in the long run and restricts the effectiveness of social rewards. However, circumstances exist where the socially minded survive, even though relative fitness is determined only by economic payoff.