Social Norms in Social Insurance

We analyze how insurance arrangements, labor supply, moral hazard, and outright cheating are affected by social norms. One question is under what conditions norms may improve social welfare. Another is under what conditions people should be allowed to opt out of social insurance. We introduce an informal production sector to analyze the consequences of alternative assumptions about the information available to norm enforcers. This highlights one important aspect of norms, namely, that they may compensate for the insurer’s limited information.