Wednesday, July 07, 2004

Competition, ethics, and efficiency

Another provocative paper by talented Prof. Shleifer. In the recent AEA Papers and Proceedings (May 2004, for online, subscription required), Shleifer asks and answers "Does Competition Destroy Ethical Behavior?". He departs from focusing on efficiency, and instead he talks about ethics.
The cases he choose are interesting: child employment, corruption, excessive executive pay, corporate earnings manipulation, and involvement of universities in commercial activities. His exposition leads to a conclusion that competition can encourage the spread of censured conduct! This sounds negative -- and surprising, given it comes from Shleifer the Beckerian. Yet, Shleifer is Shleifer. He proposes three strategies for curtailing unethical conducts: long-run market pressure, moral suasion, and government regulation. Interesteingly, he asserts, "...These arguments about long-run competition are not compelling...", "... Moral suasion is likely to work better when competition is less keen...", and "... [O]ne should not expect too much from regulation, especially where the state's enforcement powers are limited...".
Shleifer also rhetorizes: "... Globalization and the victory of laizzes-faire economics has made competiotion keener in many countries and markets around the world. Does this imply that unethical conduct is also becoming more pervasive?" Of course, Shleifer the Chicagoan answers: "No", for two reasons: "Competition is the fundamental source of technological progress and wealth...", and "...[A]s societies grow richer their views of what is ethical change as well...". Shleifer concludes: "Competition is likely to propmote ethical behavior in the long run". My take? In the long run we are all dead.

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