Where to Look for the Morals in Markets?

Matthias Sutter,Juergen Huber,Michael Kirchler,Matthias Stefan

doi:10.2139/ssrn.2819387

Matthias Sutter, Juergen Huber + Show 2 more

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https://doi.org/10.2139/ssrn.2819387

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Abstract

Markets are ubiquitous in our daily life and, despite many imperfections, they are a great source of human welfare. Nevertheless, there is a heated recent debate on whether markets erode social responsibility and moral behavior. In fact, competitive pressure on markets may create strong incentives for unethical practices (like using child labor) to increase competitiveness. While markets have been considered as detrimental for moral behavior, it has turned out a challenging task to identify where moral behavior is reflected in a market. Recent work has suggested that falling prices in markets with externalities are an indicator of declining morals. Here we examine the relation between trading volume, prices and moral behavior by presenting an experimental study where we let buyers and sellers interact on a double auction market. In one set of treatments, concluding a trade has no externality; in the other set, there is a negative externality by voiding donations for a potentially life-saving measles vaccine to UNICEF. We find that moral behavior reveals itself in lower trading volume in markets with an externality, but that market prices are hardly different between markets with or without an externality. We also vary the number of buyers and sellers and show that prices depend mainly on the relative number of buyers and sellers, but not on the existence of an externality. Hence, the market forces of supply and demand work equally well in determining prices whether or not trading has an externality.

Highlights

In the early history of economic thought, some of the most important founders of modern economics dealt extensively with the relationship between markets and morals
As predicted by a simple model of price-taking behavior by agents with an aversion against generating a negative externality from trade, we find that the presence of an externality reduces the trading volume but that the effect on prices depends on the market structure
While markets do so in many ways, for instance by shaping the way in which we bid for objects, depending on the institutional rules of the market (Roth and Ockenfels 2002), or by influencing the level of cooperative behavior in response to exposure to market economies (Ockenfels and Weimann 1999), a powerful recent debate has revolved around the question whether markets reduce moral behavior

Summary

Introduction

In the early history of economic thought, some of the most important founders of modern economics dealt extensively with the relationship between markets and morals. While Adam Smith argued that markets would, in principle, have a civilizing effect on the behavior of market participants (Smith 1763), Karl Marx and Thorsten Veblen expected markets to be destructive and bring out the worst in human beings (Marx 1867; Veblen 1899). Life, the question of how they affect human, and in particular moral, behavior is an immensely important one. Shleifer (2004) has argued that the competitive pressure in markets creates strong incentives for unethical practices (like child labor, tax evasion or corruption) to reduce costs and guarantee survival in a competitive environment. Sandel (2012) has claimed that markets—or more generally price mechanisms—might undermine moral values per se by crowding out norms such as respect for human life and dignity

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