Ethics, welfare, and capital markets

George Kanatas and Christodoulos Stefanadis

Games and Economic Behavior, 2014, vol. 87, issue C, 34-49

Abstract: We examine implications of a society's cultural emphasis on moral sentiments. Entrepreneurs and investors interact in a game that entails both adverse selection and moral hazard; entrepreneurs may attempt to breach their contracts and expropriate investors. An agent is born into a particular culture but chooses whether to develop a moral conscience and thereby subject himself to moral sentiments. In equilibrium, societies that place less emphasis on guilt exhibit a lower risk of expropriation in contracts, a greater net price of capital, a larger size of firms, increased capital inflows and greater social welfare. The results of a greater emphasis on pride are in the same direction.

Keywords: Culture; Guilt; Pride; Finance; Contract; Welfare (search for similar items in EconPapers)
JEL-codes: C70 D72 G30 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:87:y:2014:i:c:p:34-49

DOI: 10.1016/j.geb.2014.04.001

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