Maximising Social Welfare in a Principal-agent Setting through Psychological Incentives

This paper considers a game theoretical model similar to auditing models. A large group of agents must comply to a principal's rules, while having an incentive to cheat. The principal has an incentive to monitor behaviour and ne cheating agents. The current paper additionally considers a feeling of shame when an agent is caught, which reduces incentives to cheat and thus the need for monitoring eorts. Psychological incentives, such as feelings of shame, are closely related to norms and values. These could be in uenced and, in the- ory, optimised on the long term by governments, through for example education or religion. This paper proves the existence of some posi- tive, nite level of shame, such that the welfare loss of the necessity to monitor behaviour is minimised, under certain parameter conditions.