Thursday, January 2, 2014

2/1/2014: Markets, Invisible Hand & Social Ethics

A fascinating paper on the role that markets may play in influencing our social values and shaping our social ethics. Bartling, Björn and Weber, Roberto A. paper "Do Markets Erode Social Responsibility" (November 29, 2013. CESifo Working Paper Series No. 4491. Available at "studies the stability of socially responsible behavior in markets".

The authors develop a laboratory 'experimental' approach "in which low-cost production creates a negative externality for third parties' or in other words, the choice of low cost production is associated with imposition of cost on third party. However, the experimental mechanism also includes and alternative production "with higher costs" to the main parties, but which "entirely mitigates the externality". So, in other words, the contracting parties can have a choice:
1) Opt for lower cost technology at a cost to a third party, or
2) A lower higher cost technology that has no additional cost to a third party.

Obviously, choice of (2) implies stronger social values, whilst choice of (1) implies rational optimisation in normal market setting.

"Our data reveal a robust and persistent preference for avoiding negative social impact in the market, reflected both in the composition of product types and in a price premium for socially responsible products. Socially responsible behavior in the market is generally robust to varying market characteristics, such as increased seller competition and limited consumer information. Fair behavior in the market is slightly lower than that measured in comparable individual decisions."

This is really, really interesting. More specifically, the core findings are:

"In our market, competition does drive down overall prices" in other words, it delivers economically efficient outcome, "thus yielding greater relative surplus for consumers at the expense of firms".

However, "there is no detrimental effect of increased competition on the degree of concern exhibited toward externality-bearing parties outside of the market. In fact, the market share of products that yield no externality increases slightly under increased firm competition, relative to our market baseline, as does the price premium for the socially responsible product. Thus, instead of decreasing the expression of social responsibility, increased market competition in this case seems to have, if anything, the opposite effect."

The puzzling bit is why this outcome arises in the setting where the parties know they are facing higher cost by accepting the need for concern for third parties? "One possible interpretation for this finding is that, as competition yields increased surplus for consumers, they become more willing to bear the costs associated with mitigating the externality for third parties." In a sense, greater efficiency funds 'purchases' or 'consumption' of social justice.

And what about giving parties more information to attempt to steer their decisions in the desired (presumably socially) direction?

"…we consider the possibility that consumers may have limited information about the degree of externality produced by available products, but have the ability to learn about such product characteristics. This reflects the fact that many consumers do not know which firms’ products are, for example, environmentally or socially harmful, but that such information is often available if a consumer chooses to acquire it. We study both a case in which the information is free to consumers and one in which acquiring it involves the consumer incurring a small cost. In both cases, we find that the need for consumers to actively acquire product information regarding social impact has only a small effect—though slightly larger when acquiring information is costly—on the expression of social responsibility in the market."

The invisible hand of the markets, it seems, is rather kind to ethical concerns, when the markets reach at least some level of prior efficiency...
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