Incentives and Ethics: How Markets and Organizations Shape our Moral Behavior

Abstract

Do markets promote unethical behavior? This paper studies how the replacement logic impacts ethical behavior when suppliers are driven by both profit and ethical concerns. To this purpose, it proposes a unified model encompassing the three possible wedges between client and social demands: internalities, externalities, and shrouded attributes. When supplier fees are constrained, a good approximation of many medi- cal, apps and franchising environments, unethical behavior is more likely, the higher the fee and the more competitive the market. In contrast, with market- determined fees, supplier concentration has no impact on ethical behavior as less competition also means higher fees. More ethical firms are likely to com- mand a lower (higher) market share under constrained (market-determined) fees. The replacement logic also affects ethical behavior in organizations. Of par- ticular interest is the design of managerial incentives by owners to align ob- jectives despite differences in ethical concerns. Corporate choices are shown to be more ethical than owners would wish if and only if agents enjoy rents. The paper then concludes with a study of private, public, and industry (self-) regulations.

Reference

Jean Tirole, and Mathias Dewatripont, Incentives and Ethics: How Markets and Organizations Shape our Moral Behavior, December 2019.