Welfare State Disincentives with Endogenous Habits and Norms

It is assumed in this paper that habits and social norms, in particular when adhered to by many, constrain the influence of changes in economic incentives on aggregate economic behavior, but that these constraints themselves may subsequently be influenced by the very same incentives. The paper is confined to disincentive effects of welfare state policies in work, saving, asset choice and entrepeneurship. Though the existence of various constraints on economic behavior usually means that changes in economic incentives influence aggregate behavior only gradually, it is argued that major shocks may drastically speed up the process