In this paper, we offer one such model. As was mentioned above, the main difference from the neoclassical approach is that agents are assumed to be moral (norm-following), or having an additional term in their norm-dependent utility that tracks social appropriateness of alternative outcomes they choose. This addition to selfish motivation makes agents want to cooperate and enter “business relationships” with each other.

It is worth mentioning that this idea is not new and that the connection between norm-abiding behavior and business activity has been pointed out in economics for a long time [e.g., Arrow, 1972]. However, the traditional definitions that simply suggest this connection are not enough for policy and understanding institutional change. To have a workable model of institutions, the moral agents’ utility-maximizing behavior should be pinned down exactly, which means that the normative values (social appropriateness) of all outcomes should be specified.

It may seem that in a given institution the values of social appropriateness of various actions and outcomes (what is considered appropriate to do within this institution) may heavily depend on the past history of the institution, local beliefs, and other specific cultural features. This is indeed true for many existing institutions. However, it is also true that people who consider entering a new business relationship face a new context (the set of feasible allocations) that depends on the specific business opportunities available to them at that time. So, it is plausible that there are no pre-specified norms from the past, customs, or traditions that prescribe what is moral in this new context. KV propose that for such cases people have evolved _moral psychology_ , or specific machinery in the brain that computes social appropriateness of outcomes solely from the information available in any current context (feasible allocations). Such computations, if done in the same way by all moral agents, should lead to formation of similar normative beliefs about social appropriateness and consequently to coordinated, cooperative behavior [see also Rusch and Vostroknutov, 2023].

KV describe a specific moral psychology of norm formation in any context that is based on the idea of aggregating _dissatisfaction_ . Specifically, it is assumed that the social appropriateness of each given allocation is inversely proportional to the summed dissatisfactions of all agents in that allocation. The dissatisfaction of each agent in a given allocation is high when there are many other counterfactual allocations in the context that give the agent more consumption utility and low otherwise. Thus, dissatisfactions express personal grievances of agents in a given allocation, and the normative value of the allocation is formed by aggregating all these dissatisfactions. In other words, the allocation is considered more socially appropriate, the less aggregated dissatisfaction it evokes.

This construction may seem overly complex and unnecessary. However, tests of existing experimental data have shown that the model of dissatisfaction-based norms can account for many puzzles in social behavior known to behavioral economists.<sup>4</sup> Specifically, it resolves many issues pertaining to the existing models of social preferences and reciprocal kindness [see Vostroknutov, 2020, for discussion] that are not context-dependent enough to accommodate certain stylized facts (e.g., radical context-dependence 4Experiments by Merguei et al. [2022] and Panizza et al. [2021] perform direct and rather stringent tests of KV’s model and find a very good fit with the data.

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