Social norms,cooperation and inequality

This paper analyzes the outcomes that can be supported by social norms in a society of infinitely lived and patient agents that are randomly matched in pairs every period to play a given game. I find that any mutually beneficial outcome can be supported by a self-enforcing social norm under both perfect information and a simple local information system. These Folk Theorem results explain not only how social norms can provide incentives that support cooperation in a community, providing support to the concepts of social capital and corporate culture, but also how they can support inequality and discrimination.I am grateful to David Levine for invaluable guidance and ideas. I also thank Anna Aizer, Hongbin Cai, Walter Cont, Ernesto Dal Bó, Jean-Laurent Rosenthal, Federico Weinschelbaun, William Zame, anonymous referees and seminar participants at Universidad de Buenos Aires, UCLA, Universidad T. Di Tella, Harvard Business School and Stockholm School of Economics for very useful comments and discussions