26 Sep 2012  Working Papers

License to Cheat: Voluntary Regulation and Ethical Behavior

Executive Summary — One powerful tool, at least in theory, that policymakers can rely on to stem cheating is regulation through monitoring and sanctions. But regulation does not really help when individuals and firms who are supposed to be regulated may have the ability to determine how much regulation they face, or even whether they face it at all. This paper studies what happens when individuals can avoid or circumvent regulation and monitoring intended to curb unethical conduct. Results from several experiments show significantly more misreporting under voluntary regulation (where participants have a choice of whether to be regulated) than when they are either all submitted to mandatory regulation or when no opportunity for regulation exists. These findings have several practical implications: For example, policies imposing either no regulation or total regulation may be preferable to policies that allow for regulation that is easily circumvented. Key concepts include:

  • Easily avoidable regulation may lead to outcomes that are worse than simply having no regulation.
  • When individuals can choose whether to be voluntarily subject to regulation, they might conduct greater unethical behavior than when behavior is completely unregulated.
  • Policymakers have the tool of increasing the visibility of the choice to be regulated, in order to enhance the voluntary adoption of regulation and decrease subsequent unethical behavior.
  • Policymakers' choices concerning the presence of regulation in one domain can affect behavior in other, unregulated contexts.

 

Author Abstract

While monitoring and regulation can be used to combat socially costly unethical conduct, their intended targets are often able to avoid regulation or hide their behavior. This surrenders at least part of the effectiveness of regulatory policies to firms' and individuals' decisions to voluntarily submit to regulation. We study individuals' decisions to avoid monitoring or regulation and thus enhance their ability to engage in unethical conduct. We conduct a laboratory experiment in which participants engage in a competitive task and can decide between having the opportunity to misreport their performance or having their performance verified by an external monitor. To study the effect of social factors on the willingness to be subject to monitoring, we vary whether participants make this decision simultaneously with others or sequentially as well as whether the decision is private or public. Our results show that the opportunity to avoid being submitted to regulation produces more unethical conduct than situations in which regulation is either exogenously imposed or entirely absent.

Paper Information