Behavioral Economics for Leaders

CHAPTER 41Markets Hurt Morality: Government Intervention Can Help

Corporate scandals such as the one at Enron or “Dieselgate” at Volkswagen repeatedly raise the question of whether market economies undermine morals at companies due to competition. Is that the case?

As a scholar, I listen to many lectures held by researchers around the world. Normally, listening doesn’t involve my emotions much. When I listened to a lecture in the fall of 2012, that was a different story. I had invited Armin Falk from Bonn University to Innsbruck, Austria, for a lecture, and he spoke about a research project on ethical behavior he conducted with Nora Szech. In one experimental condition, the study participants had to decide whether they wanted to waive $10 to save the life of a mouse or whether they wanted to collect the $10 with the consequence that the mouse was euthanized. For participants to be able to imagine better what the euthanization of a mouse entailed, Falk showed a video of the killing process (he didn’t make the video himself).

As another experiment condition, the participants didn’t have to decide individually whether they wanted to collect the $10 and accept the death of a mouse; in this case, they would act on a market. Nine vendors each had a “mouse” (not literally, but their decisions were relevant to nine mice). Seven buyers didn’t have any mice. Now both sides of the market could make proposals on how the $20 should be divided up between one vendor and one buyer. If both ...