Economics of Ethics Flashcards
(9 cards)
Jin, & Leslie. (2003). The effect of information on product quality: Evidence from restaurant hygiene grade cards. The Quarterly Journal of Economics, 118(2), 409-451.
For example, Jin and Leslie 2003 - The Effect of Information on Product Quality: Evidence from Restaurant Hygiene Grade Cards
Hypothesis;
- an increase in provision of information incentives firms to improve product quality.
Methodology;
- natural experiment with Los Angeles requiring publicly displayed food grade cards.
Data;
- Every restaurant, revenue, people admitted to hospitals with food poisoning related illnesses.
Findings;
- Health inspection scores increase 5%
- With grade cards, obtaining an A-grade causes revenue to be 5% higher than a B-grade on average.
- 20% decrease in foodborne illness hospitalizations.
- Voluntary disclosure also led to improved scores (due to full disclosure or anticipatory effects)
Relationship; information unraveling and asymmetrical information
Inducing choice paralysis: How retailers bury customers in an avalanche of options
3% of 24 jams bought, 30% of 6 jams bought. Choice paralysis.
Health insurance from 4 or 8 options, varied monthly premiums and deductibles. From 4, 40% chose best option, from 8 20% chose best value.
Psychological bias
- Present bias
- Status quo / default bias
- Loss aversion
E.g. offered savings on electricity, 96% stuck with default.
Fiduciary responsibility
The responsibility a business owner has to fulfill shareholder expectations. This includes profit maximization, contrary to corporate social responsibility, in addition to utilitarianism (maximize utility within society). This means a lack of consideration for redistribution, welfare, taxes, environment, and all else, according to Freidman.
They are allowed to do this so long as they operate within the rules of the game, not breaking the law (or not getting caught, or lobbying to change laws).
Bean counting
A phrase representing the practice of weighing the cost of lives lost / lawsuits as a result of not taking an action, versus the cost of taking an action.
E.g., car manufacturers have a defective part. The probability of defectivity leading to a death is P, and the cost per death is C. The cost of replacing the technology is X to reduce risk to R, where r < p.
Where X + C(r) < C(p), a beancounter will choose not to replace the defective part despite leading to more deaths. Or, the cost of replacement plus the probability of accident after replacement * cost of lawsuit is more than the cost of lawsuits * the probability of the defective product.
See, for example, Firestone / Ford, with 50 deaths and 300 incidents leading to the recall of more than 6 million tires as the cost of lawsuits out ways the cost of replacing the tires, and initial cost was miscalculated.
Trolley car problem and Utilitarianism
Utilitarianism is the concept that one should maximize utility across society, even if it involves harm to a minority group. People are not purely utilitarian, as seen in the trolley problem; most people would change the tracks to kill the single person rather than letting the 5 die, but most would not push a man onto the tracks to save 5 people.
Asymmetric information (ethics)
Asymmetric information is present when one party to an economic transaction possesses greater material knowledge than another party.
- Usually sellers know more about what they are selling than buyers
- Workers know more than employers about how much effort is going into their work
The buyer with less information will do worse, and those with more information at times fail to account for that and set prices below expectations.
“lemon problem”
Overcome through
- Nepotism
- Third party inspection
- Warranties (reduced risk and signal of quality)
- Due diligence
- Information provision laws
- Branding
Adverse selection (ethics)
Subpar products are more likely to be put up for sale, increasing the proportion of subpar products; the market price reflects the average value of products, and those with high quality products will not enter the market.
- For example, if one car is worth 6k, the other 8k, and the market price is 7k, the 8k car will not enter the market if buyers cannot differentiate. The only one left is subpar.
- Full disclosure; if the owner of a good quality product reveals the value of the car, buyers are willing to pay more for a better quality product. The second best owner is incentivized to reveal value, so that they may get a price above the average. The only car who does not disclose value is the lemon.
Information unraveling
If some stand to benefit by revealing a favorable value of a trait, others
will be forced to disclose their less favorable values.
Not disclosing will be interpreted in the worst possible light.
For example, Jin and Leslie 2003 - The Effect of Information on Product Quality: Evidence from Restaurant Hygiene Grade Cards
Hypothesis;
- an increase in provision of information incentives firms to improve product quality.
Methodology;
- natural experiment with Los Angeles requiring publicly displayed food grade cards.
Data;
- Every restaurant, revenue, people admitted to hospitals with food poisoning related illnesses.
Findings;
- Health inspection scores increase 5%
- With grade cards, obtaining an A-grade causes revenue to be 5% higher than a B-grade on average.
- 20% decrease in foodborne illness hospitalizations.
- Voluntary disclosure also led to improved scores (due to full disclosure or anticipatory effects)
Corporate Social Responsibility
Corporate Social Responsibility (CSR) is the concept that businesses have a responsibility to society and the environment beyond their economic obligations to shareholders. It is beneficial to business as
- Attracts more motivated workers who care (harder working for less money)
- E.g. Tracy Kidder, lots of money to make a boy die not in pain, inspired others to join the mission
- Stakeholders who do not agree can sell shares and leave (fulfills fiduciary responsibility) - See ben and jerrys
