Cultural norms and financial incentives: A model of how to fund universities

Abstract

This paper derives the optimal compensation contract when two asymmetrically verifiable tasks are tied together, a cultural norm of behavior coexists with a financial incentive, and public funding is also a concern. To formulate ideas, we restrict the attention to higher education. The model generates at least three results: First, the monetary incentive for research crowds out the social teaching norm, i.e., peer pressure. Second, increased intrinsic motivation in teaching induces a social multiplier effect on the teaching effort. Third, the government underfunds the university if the teaching standard is lower than that of the government to implement its standard.