Research in psychology and organizational behavior under the heading of “behavioral ethics” is growing rapidly, offering new insights into how people (individually and in groups) choose whether to comply with legal and ethical norms. In legal scholarship, a robust literature is emerging on the subject organizational compliance, as public enforcers become more insistent that corporations build and maintain state-of-the-art systems. This chapter joins these two bodies of research, demonstrating the potential payoffs—and challenges—in using a behavioral frame of reference to assess compliance risks, design appropriate interventions, and communicate more effectively about both law and ethics with corporate managers and other employees. Just as compliance requires good economics skills, it requires psychological savvy as well, to help predict how incentives and compliance messages will be processed, construed and acted upon in the field.
This chapter reviews the empirical literature on the factors related to the likelihood and detection of corporate wrongdoing, which increasingly focuses on internal governance, and examines calls to split the traditional tasks of the General Counsel (GC) between the GC and a Chief Compliance Officer (CCO) who reports directly to the Board. The reason for this is to have more independence and expertise in compliance matters than the GC’s office traditionally provides. This chapter argues that although independence is often valuable in reducing wrongdoing, in this context it is likely to come with additional costs that may make gathering information on wrongdoing more difficult. In particular, some employees may be more reluctant to provide information to a CCO than to the GC, and this might sometimes result in increased wrongdoing and weaker operating performance. These deleterious effects, however, might be somewhat ameliorated by institutional and governance design adjustments. This chapter examines what factors may drive likely outcomes and finds that further empirical inquiry would be valuable and suggests some ways in which future research might engage in this inquiry.
Edited by Jennifer Arlen
Owen D. Jones
What’s holding Behavioral Economics back? And what can be done about it? The fields of Behavioral Economics and Behavioral Law and Economics have each supplied important and useful insights. But the state of knowledge has changed rapidly across the decades since Tversky and Kahneman first highlighted how people sometimes systematically depart from predictions of the standard expected utility model in neoclassical economics. Those changes now render it uncomfortably obvious that Behavioral Economics, and those who rely on it, are falling behind with respect to new developments in other disciplines that also bear directly on the very same mysteries of human decision-making. This chapter identifies four problems for Behavioral Economics. It explores their causes. It then suggests and illustrates ways around them, including a path for integrating multi-disciplinary insights. The chapter provides concrete recommendations that can help to move these important schools of thought forward, in light of developments in other fields.
Valuation gaps and exchange asymmetries are among the most widely studied phenomena in the field of behavioral economics. This chapter presents the current state of the social science literature related to observed reluctance to trade. Numerous theories have been proposed and only a few might be safe to rule out based on the evidence to date. A number of theories have been developed and tested by both economists and psychologists including endowment theory, substitution theory, expectation theory, preference uncertainty, mere-ownership theory, enhancement theory, subject misconceptions, and regret avoidance. The chapter walks through each proposed theory, cataloging the evidence for and against. While some theories have garnered more support from the data than others, no single theory yet deserves the title of leading theory. As this chapter makes clear, much more work is required to develop a theory or set of theories worthy of designation as the leading theory.
Benjamin Ho and David Huffman
Understanding the nature of trust has substantial implications for thinking about the economics of law. In this chapter the authors consider the interaction between laws and trust. They pursue this inquiry by looking at the growth of the behavioral economics and organizational economics literatures. After describing a model of trust, the authors review results on the relationship between trust and growth from the development and macroeconomics empirical literatures. The chapter then turns to evidence from experiments that shed light on mechanisms that may link trust and the law and help us understand why in some circumstances they may be complementary and in others substitutes. The authors draw some preliminary conclusions about the factors that might contribute to explaining complementarity of trust and the law at the macro level. The chapter ends with a discussion of some specific laws, and how these interact with trust.
Edited by Joshua C. Teitelbaum and Kathryn Zeiler
How to design punishment mechanisms to maintain social order is a central question in law. Xiao reviews recent behavioral economic research on how punishment influences prosocial behavior, much of which provides evidence that punishment can have a negative effect on cooperation. She discusses several factors that can lead to the detrimental effect of punishment and suggests some solutions. She argues that the effectiveness of punishment is closely connected to its role in expressing social norms. She ends the chapter by reviewing some recent research on social norms and suggesting punishment and social norm instruments are complementary in promoting cooperation.
Sanjit Dhami and Ali al-Nowaihi
Dhami and Ali al-Nowaihi consider the applications of prospect theory to crime and punishment. The authors apply prospect theory to a generic model of crime and discuss the implications. They discuss two problems in depth. The first is the tax evasion problem. The second is a foundational result in law and economics, known as the Becker proposition. They also note the limitations of the framework.
Behavioral law and economics’ effort to replace standard microeconomic assumptions with more realistic, yet still simple assumptions—without jettisoning a basic economic orientation toward behavior that emphasizes prices and utility maximization—has led to the acceptance of an oversimplified view of human judgment and decision-making. Supposedly descriptive claims found in Behavioral Law and Economics often ignore heterogeneity in results and interactions among variables, emphasize the existence of effects over the size of effects and their practical significance, avoid open questions about external validity, and embrace vague labels rather than delve into the multiple psychological processes and other non-psychological factors that may cause or account for behavior. The price of this abstraction is a lack of predictive and explanatory validity and an inability to provide reliable policy guidance.