Infectious Ethics: How Upright Employees Can Ease Concerns of Tacit Collusion

Abstract

The recent spate of corporate scandals in the United States has led to a newfound emphasis on developing a culture of ethics within organizations. Many hope the leadership of a few can help persuade ethical behavior by others. This article suggests that direct interpersonal influences need not necessarily be present for individuals to spur such a culture. In this article, incentive contracts make use of relative performance evaluation, which gives rise to concerns of tacit collusion among employees. Ethical employees stand to alter the behavior of others, since their mere presence limits the number and size of potential collusive coalitions. As a result, the firm finds it much easier to motivate not only those who themselves are ethical but also those who act entirely in self-interest. (JEL J33, M14, M52)