Value Formation: The Role of Esteem

People's values are a critical determinant of their behavior. But, how do values form and what causes them to change? This paper proposes a theory of value formation. In the model, agents choose values, motivated by economic considerations and, crucially, also by the desire for esteem. The comparative statics are driven by the following tension: agents obtain more esteem from peers if they conform in their choice of values; but they may obtain more self-esteem if they differentiate. This tension explains why, for instance, peer effects are sometimes positive and sometimes negative. Three applications are considered, related to: schools, inner cities, and organizational resistance.