Ethics,welfare, and capital markets |
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| Affiliation: | 1. Jones Graduate School of Business – MS 531, Rice University, 6100 Main Street, Houston, TX 77005, United States;2. University of Piraeus, Department of Banking and Financial Management, 80 Karaoli & Dimitriou, Piraeus 18534, Greece;1. University of Heidelberg, Germany;2. University of Amsterdam and Tinbergen Institute, The Netherlands;1. Department of Government, University of Essex, Wivenhoe Park, Colchester CO4 3SQ, United Kingdom;2. Faculty of Engineering, Information and Systems, University of Tsukuba, 1-1-1 Tennodai, Tsukuba, Ibaraki 305-8573, Japan;3. WZB Berlin Social Science Center, Reichpietschufer 50, D-10785 Berlin, Germany;4. Department of Economics, University of Heidelberg, Bergheimer Str. 58, 69115 Heidelberg, Germany;1. Department of Economics, London School of Economics, Houghton Street, London WC2A 2AE, United Kingdom;2. Department of Economics, University of Essex, Wivenhoe Park, Colchester CO4 3S, United Kingdom;3. Department of Economics, Columbia University, 420 W. 118th Street, New York, NY 10027, USA;4. Department of Economics, University of California, Berkeley, 549 Evans Hall #3880, Berkeley, CA 94720-3880, USA;1. eBay Data Labs, United States;2. Harvard University, United States;3. Harvard Business School, United States |
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| 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. |
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| Keywords: | Culture Guilt Pride Finance Contract Welfare |
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