Working Paper: CEPR ID: DP12060
Authors: Alan Morrison; John Thanassoulis
Abstract: We study a firm with ethical employees who can adopt a profitable working practice that may harm their customers. Their response to this dilemma reflects their compensation contract as well as their ethical willpower. We identify optimal compensation contracts under utilitarian and deontological (duty-based) ethical standards. With utilitarian employees, and irrespective of employee willpower, a profit maximising firm with sophisticated customers generates the ethically best outcome. Organizational culture emerges as an equilibrium phenomenon. If the firm is a partnership, if sales commissions are hidden, or if customers are naive the firm may use bonuses to create a culture of malpractice.
Keywords: culture; ethics; behavioural norms; bonuses
JEL Codes: D03; G02; G20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| compensation contracts (J33) | ethical decision-making of employees (M14) |
| profit-maximizing behavior (D21) | harmful practices (J81) |
| ethical standards (A13) | willingness to adopt harmful practices (P37) |
| higher willpower (D91) | lower invocation of harmful practices (P37) |
| organizational culture (M14) | culture of malpractice (K41) |