Incentive to cheat

Joseph Delaney quotes Matthew Yglesias writing this:

But it is entirely emblematic of America’s post-Reagan treatment of business regulation. What a wealthy and powerful person faced with a legal impediment to moneymaking is supposed to do is work with a lawyer to devise clever means of subverting the purpose of the law. If you end up getting caught, the attempted subversion will be construed as a mitigating (it’s a gray area!) rather than aggravating factor. Your punishment will probably be light and will certainly not involve anything more than money. You already have plenty of money, and your plan is to get even more. So why not?

Yglesias’s quote is about Donald Trump but the issue is more general than that; for example here’s Delaney quoting a news report by Matt Egan regarding a banking scandal:

These payouts are on top of the $3.2 million Wells Fargo has paid to customers over 130,000 accounts over potentially unauthorized accounts. That works out to a refund of roughly $25 per account.

From an economics perspective, this is all standard stuff, falling under the category “moral hazard”: When the expected benefits from cheating greatly exceed the expected costs, there’s an incentive to cheat. If the difference between the expected financial benefits and costs is small, then the incentive is small or even negative, as there are reputational costs to being caught cheating, and most of us feel bad about cheating, also it can be difficult to persuade others to collude in an illegal scheme. But when the gap between expected benefits and costs widens, eventually people will grab the opportunity, and then others, seeing the rewards, will join in. Etc.

As the freakonomists say, “incentives matter.”

One question, then, is why is this sort of thing not discussed more in pop-econ? We heard a lot about why inner-city drug dealers live with their mothers—something to do with economics, I recall—but no corresponding chapter about how suburban pharmaceutical executives (that’s another kind of drug dealer, right? And I say this as a person who works in pharmaceutical research myself) are motivated to misreport drug trials. We heard about the incentives that encourage real-estate agents, auto mechanics, and doctors to rip you off, but not the ways in which the legal system gives an incentive for wealthy and powerful people to break the law.

This is not about Freakonomics, which is the product of two creative, hardworking people who can feel free to write about whatever interests them the most. I’m just using them as a convenient example.

Really my question is about how this particular incentive-to-cheat identified by Delaney and Yglesias is not discussed more. Why is it not the standard example among economists when talking about the effects of incentives? An incentive to systematically break the law—that’s a pretty good one, right?

Why don’t economists don’t talk more about the incentives for white-collar crime? I suspect it’s because many economists think of business regulation as fundamentally illegitimate. Not that they think all regulation is bad, but just about any regulation can make the typical economist a bit uncomfortable. Hence weak enforcement is perhaps viewed as a feature as much as a bug, and perhaps the mainstream view in economics is that it’s just as well that people in business will push against the rules.

Even if you oppose a law, it’s still a relevant point of economics and political science that weak enforcement gives an incentive to break the law—but maybe there’s something uncomfortable about making this point in a textbook or general presentation of economics. I don’t see it as a left-wing or right-wing thing, exactly, more that there’s something so upsetting about thinking that the system is set up with incentives to cheat, that we avoid talking about it unless we really have to. Cheating among sumo wrestlers, real estate agents, even doctors—sure, that’s unfortunate, but at least we can see our way to economics-based solutions. But a legal system that’s set up to reward cheating—that’s just scary, so better not to think about it. Or, at least, not to consider it as part of economics or political science, at least not most of the time.

47 thoughts on “Incentive to cheat

    • John:

      I agree that economists recognize that incentives affect criminal behavior, and it comes up in specific cases, but I don’t think they present it as important as it is. I don’t think “Freakonomics” is the only example of pop-econ with lots on incentives affecting behavior for people low on the economic food chain but without considering the systematic effects of incentives for cheating for business executives.

      • The question of whether it is better to pay for parking or park illegally and pay the eventual fine is addressed for example at http://timharford.com/2006/05/parking-fine/

        The case of corporations behaving badly and paying fines which are a fraction of the ill-gotten gain is not really different (and regularly comes up in the news, I don’t think anyone would find it particularly surprising).

      • Economics has a big “principle-agent” literature about how to set up incentives for managers to rein in their avarice and act appropriately. The default assumption is that managers will completely run amok if not constrained. (This literature goes back to at least to Berle and Means (1932).)

        There is a whole “Law and Economics” literature that talks about the incentives created by laws (for businesses as well as individuals). For instance there is a sizable literature about when it is optimal to break a contract.

        Is all this adequately reflected in the pop-econ literature? Can’t say, and don’t want to do the work to find out. Maybe the pop-econ literature focuses more on examples an ordinary reader can relate to.

      • In addition to what everyone else has mentioned there is mechanism design, which has been a topic in a couple of Nobel Prizes including Jean Tirole’s work on regulation. Simplistically, since its not my field, the idea in relation to regulation is to design a mechanism that gives the incentives for the regulated entity to do what the regulator wants them to do, rather than just tell them “do this or don’t do that.”

    • I would way that Becker’s work largely ignored white-collar crime (and I will refrain from writing a long piece on what I mean by that term). There are reasons for that, some of which people have mentioned, but I just don’t think that he was really interested enough in crime except as an example of applying his ideas, to consider that some legally prohibited activities (including discrimination mentioned in the first paragraph) are not actually crimes in the legal sense is just one example. Still, I’d say Andrew’s instinct that pop non-pop “think” pieces about crime generally don’t really reflect much understanding of crime or the criminal justice system or the other justice systems (e.g. the SEC can impose fines or ban people from the securities industry for life).

  1. Andrew makes an extremely important point – we structure the game so that the business elite have strong incentives to cheat.
    The same effective inequality before the law literally broke God’s power on earth (selling indulgences). And here’s how Shakespeare makes the same point… Why dread “the curse that money may buy out…by the merit of vile gold.” (King John)
    ( Further details http://bigthink.com/errors-we-live-by/our-unfaithful-cardinals-of-capitalism )

    And regarding regulation, economists (as on many other issues) are backseat driving, see
    Every Good Business Should Want Regulation… both main senses of “good”
    Here’s how “the market” decides
    How Many Deaths is Cheap Chicken Worth
    http://bigthink.com/errors-we-live-by/big-chicken-shows-bad-games-plague-economics-and-politics

  2. Because most regulations are just baseball sized rocks tossed into a river hoping to annoy it. They’re just the cynical agency’s response to the cynical politician’s reply to his constituent’s demand that he “Do something!”

    Consider instead workmen’s compensation laws. Once enacted killed and injured workers became expenses on the company’s ledger and quickly trade associations spawned safety groups charged with finding the most efficient means of reducing injuries. And they were very effective. But then came OSHA and its clip boards, forms, petty fines and rules about the shape of toilet seats in the men’s room and suddenly the goal became following the rules to the letter; parsing them as lawyers will. If you’ve ever been involved with an OSHA investigation following a workplace fatality you’ll know they’re just kabuki theater – everyone going through the motions, being interested only in seeing that all I’s are dotted and T’s crossed.

    The voluntary safety associations largely died of irrelevance and the plunging injury rates leveled off. Finally someone noticed that OSHA was to workplace safety as the FAA was to aviation safety; ie the real work of identifying causes and fixes of accidents was going to have to be done by people free to think outside the clipboard. For aviation that meant the NTSB and in the chemical plants and refineries it has meant the Chemical Safety Board. If you go to any well run company with earnest safety professionals you’ll find they talk the talk of Csb.gov – process safety management and root cause analysis – and rarely if ever the latest torrent of regulations promulgated by the bureaucracy.

    Regulations are favored by those who prioritize punishment over prevention.

  3. (Sorry about any harshness of tone in this but I threw out my back and am not in a good mood.) I don’t think you grasp the function of a legal system. It isn’t to achieve fairness. Never has been. The point is to keep human behavior and misbehavior within socially approved bounds. That there is white collar crime, that there has always been white collar crime, expresses society’s views about the boundaries society imposes. That specifically means a balance of the costs of imposition – the cost of policing various forms of crime – versus the perceived payoffs from those incurred costs. You can take this in a number of directions. One is ‘critical legal studies’, meaning the view that law reflects power and thus is largely oppressive, that it serves largely as a tool to maintain control. CLS is essentially Marxist principles, down the same veneer of analysis; it views all law as reflecting class, racial and ethnic conflicts and specifically views those in terms of those being controlled. Essentially a grievance based system in which the grievances are recast to be those who make and enforce the law. (I think they just want to be the ones who get a turn oppressing others.) You can see how the CLS and associated views look at white collar crime: it’s institutionally enabled as a tool to generate and maintain wealth and power. A less politicized view is that white collar crime has different policing issues: much greater difficulty discovering crimes, investigating and proving crimes, prosecuting crimes, etc. And that extends to punishment: a person arrested for breaking and entering is a ‘common’ criminal and we note the times that person comes from a ‘good family’, like a bank robber who turns out to be an accountant with a family. That’s man bites dog. Regular criminals are not deterred by social stigma but are deterred – sometimes – by the odds of being caught. (Which are shockingly low in studies. One London study said the average arrestee had committed 26 crimes for which he was not caught!) White collar criminals are mostly deterred by stigma, by the loss of face in the community, by the loss of family status. Yes, it’s a shame that bankers weren’t sent to jail for things like fraud in foreclosures. Those are really hard cases to prove because crimes require actual mens rea, meaning criminal intent. The main effect of a big investigation or threats of same is in the threats to social standing, etc. not in actual jail time. Every prosecutor knows that.

    Again, the law is and has always been set up to manage human behavior within the bounds that society allows. There is no expectation of ‘fairness’, except in the general sense that your case will be treated in roughly the same way. That extends to having a lawyer and a speedy trial in criminal cases and to rules of evidence but not much else. You are not entitled to great representation, only competence and then the standard is pretty low. You are not entitled to spend money you don’t have to defend or attack, even when your adversary, be it state or private party, is much wealthier. The expectation of fairness is not like your academic world in which honesty is supposed to be the prime value. Transparency in law is not expected; there are rules about what you must disclose and when because the idea is you generally don’t disclose except for what you must.

    I think there’s a strange movement in this country toward a concept of fairness that’s never existed here. We saw it yesterday when the Federal court of appeals ruled NC districts are unconstitutional because they were ‘partisan gerrymandered’. I may be wrong but I don’t expect that decision will hold up. For all I know, you’ve contributed to the gerrymandering analysis – I know you’ve written about the subject many times – so you likely know that there’s no precedent for this when there aren’t additional factors like race involved. Oddly, the court said ‘partisan’ was ‘worse’ because there can be good reasons for racial gerrymandering. While the latter half of that sentence is true, the first half is the kind of absurdity you really hope not to see in a federal court opinion. This movement sets up the courts as arbiter of ‘fairness’ in political process. It’s a huge power grab in one sense: now the courts decide what winning in politics means. If one side wins ‘too much’, then it’s not that the other side needs to run candidates that appeal to those voters but that we change the voters. That’s never been the case.

    But then this ‘fairness’ idea is showing up all over. A major argument made against Trump orders is that people relied on them. Some courts buy this. So basically once a President puts an order in place, that creates a ‘right’ of ‘fairness’ that locks that order in place? Never been law before. Using that logic, we can’t change the tax code because people rely on it. The extent to which this ‘fairness’ notion – which unites with ancient concepts of reliance and estoppel – extends will be settled in the relatively near future by the Supreme Court. I don’t see it siding with the creation of ‘rights’ based on acts by one President or even by Congress. Think of abortion: the argument has been about whether a ‘right to privacy’ exists when it isn’t stated explicitly in the Constitution, but now we’re going to recognize rights – to immigration, to stay in this country, to have specific environmental rules in place remain in place – because they were put in place by an act of a President or by a law? If the Court had a different composition, I would not expect ‘fairness’ to win outright because then the majority would be concerned about opening Pandora’s Box. A minority can make arguments they would not make in the majority.

    In your field, the real brake against fraud is the threat of exposure and what that costs. This is white collar crime. Academic standards of honesty are actually pretty bleeping low in most fields: distortion and dishonesty in service of an agenda or some creative argument are the norm, not the exception. In quantitative fields, it’s just harder to get away with that, though distortion of the data – all your themes of manipulation – are also the norm. That is the channeling of human behavior. The ultimate truth is more like: almost nothing produced in academia has lasting value so what you can make for yourself in your career in your life now is more important. Not many people contribute anything memorable. You expect too much of them.

    It isn’t scary the legal system is set up to encourage cheating. It’s adversarial. The entire idea of an adversarial system is that truth comes out through the presentation of conflicting views of reality. Prosecution is not required to ask questions that make the state’s case weaker. A plaintiff is not required to admit maybe the defendant wasn’t as negligent as argued and certainly isn’t required to say I screwed up too (which is important since so many places have comparative negligence and many cases involve multiple parties where fault may be apportioned).

    You seem to confuse politics with law. It’s a political point that Trump is ignoring Russian interference in elections, just as it’s a political point that the US regularly interferes in other countries (including Ukraine, Russia, etc.). It’s also a political point that Obama sold our uranium to Russia and let Hizbollah traffic drugs and weapons so he could make a deal with Iran. Politics is dirty and perspective-based. Let’s say Oprah runs for President: now we’d have a billionaire TV personality who has hawked pseudo-science products and backed quackery. She’s terrific if you’re a Democrat because she’s Oprah and that means all the crap associated with her doesn’t matter that much. Fair? Who says what’s fair? The courts?

    Back in Bill Clinton’s era – remember him, the beloved sex abuser accused of rape during the campaign and who was impeached for sexual abuse of an intern – Lani Guinier was nominated for a civil rights job. I actually read her articles. In one of them she argued that results needed to be proportional, that if one group has a majority then they will ‘win’ all the votes so what needs to happen is not proportionate representation but proportionate results, except of course those would need to be weighted because some results matter more to one group than another. She actually used examples like choosing some sort of prom stuff in a high school. In other words, the courts would oversee ‘fairness’ to regulate results even down to social decisions. We have been moving in that direction. It may be the back pain talking but I’ve largely written off this world and have trouble caring about such nonsense.

    • Jonathan:

      I hope your back pain diminishes. That sounds horrible.

      Regarding your main points: I think you’re arguing with someone here who’s not me. You start right up with fairness but I never wrote anything about fairness. I was talking about economics and incentives.

      Regarding gerrymandering: I haven’t done any work on the topic lately—my most recent involvement was to decline to sign a petition on the topic that made some claims that I didn’t believe—but, speaking generally, I can tell you that the law on gerrymandering is tricky. It’s only been since the 1960s that legislative districts have been required to be of equal population, and now this is considered a bedrock requirement. Is it a good idea to for courts to rule on partisan gerrymandering? Maybe so, maybe not, but it’s not new: indeed, we’ve argued in the past that the thread of court challenges is one reason that past gerrymanders have not been too extreme.

    • Very impressive post. Very thoughtful. Very readable.

      Some random comments:

      “I don’t think you grasp the function of a legal system. It isn’t to achieve fairness. Never has been.”

      I think your point is even stronger. The point of a legal system is to get people to resolve their disputes indoors rather than outdoors with clubs and knives. Some logic and predictability would be nice, but those concerns are second order. Justice is a rarity in the legal system.

      “This movement sets up the courts as arbiter of ‘fairness’ in political process. It’s a huge power grab …”

      Relatedly, I find extremely disturbing the Supreme Courts new doctrine of “animus”, and how the lower courts are taking it up with enthusiasm. It basically says the court can strike down any action, or force any action based on its gaze into your soul. If it finds your soul to be tainted by “animus” it has complete power to dictate what you may do and what you must do. It is only a small additional step to render the presidency a nullity by finding that “animus” permeates all the president’s actions. The court is on the verge of arrogating to itself absolute power.

    • Fairness has always and will always exist within human societies. Your argument seems to be that justice is not a part of the Legal Justice system. I don’t even know how to process such a statement that is so obviously contrary to the foundations of such a system.

  4. I think for most economists, what determines whether or not fraud is socially harmful is the degree of competition. If you have a market that is well known to be impacted by information issues, like health care, there can be open season on fraudulent suppliers. It is believed, however, that most business executives work in highly competitive labor markets that price their marginal products accurately, so the occasional dissimulation will have little effect.

    It’s fascinating to watch when economists redraw the boundary between competitive and efficient markets on the one hand and “imperfectly” competitive and vulnerable markets on the other. This happened post-2008 with banking. Before, there was widespread doctrinal assurance that bank malfeasance was not worth worrying about, that it would be corrected by competitive markets on both the asset and liability side. Then came the crisis and it was obvious that incentives to deceive for personal gain could in fact corrupt the entire system. The epiphany that such a thing was possible is what Alan Greenspan was describing in his famous comment post-crash. Today there is an army of economists working on incentive-compatible regulation of finance.

    Meanwhile, in response to Thanatos Savehn: no, workers comp pre-1970 did not solve America’s occupational safety and health problem, and OSHA, under the right circumstances, does help a bit. US regulation is not close to ideal, and you might be interested that the most effective national systems, like Germany’s, integrate regulation and insurance (and also worker participation mandates). Still, research shows that OSHA inspections do reduce accident rates, and OSHA works most effectively when firms are unionized (so it can be a weapon for unions to win safety concessions). There is substantial academic research on this question; ideological priors aren’t enough.

    • It’s fascinating to watch when economists redraw the boundary between competitive and efficient markets on the one hand and “imperfectly” competitive and vulnerable markets on the other. This happened post-2008 with banking. Before, there was widespread doctrinal assurance that bank malfeasance was not worth worrying about, that it would be corrected by competitive markets on both the asset and liability side. Then came the crisis and it was obvious that incentives to deceive for personal gain could in fact corrupt the entire system.

      Good point.

      Generally, it is reasonable to expect sophisticated investors to take reasonable care in looking after their own interests, and, if they don’t, its their loss. The lesson of 2008 was the ripple effects of financial losses to innocent bystanders.

  5. I’m not sure, Andrew, if you’re talking about constraints on people or constraints on corporations, and on whether you’re focused more on the economics literature or the pop-econ literature. People within corporations are often acknowledged to have weakened incentives to do the right thing because their personal incentives run differently… that’s the whole principal-agent literature which is immense, even when reduced to the part about agents obeying the law. Then there’s the law and economics literature discussed above, which is also huge…. how much should we punish those who commit crimes that hard to detect?

    As to whether corporations themselves conspire to break the law, as opposed to rogue employees (and note that “rogueness” is also a statement about how much the corporation spends on internal controls) there is a big underlying argument, which is not really an economics argument, that it is unfair to punish all the people who work there, blamelessly (with a rump opinion that they had it too good for too long.)

    All of this comes together, and was discussed endlessly, in the Enron WorldCom/MCI era of the early 2000s. (a) What prompted Skilling’s behavior? (b) Were Enron’s faults technical faults or fundamentally criminal? (c) should we feel sorry for Enron employees who lost their jobs? (d) should corporations be charged with felonies since to do so probably ends the corporation (due to financial constraints) without ever trying them? I think all of this was discussed extensively in the pop-econ literature of that era. (The Smartest Guys in the Room comes to mind.) And I think economists are still torn about what to do about it. Stronger regulations catch more crooks… they also make it more difficult to do business and therefore make it more difficult to get goods and services to people through higher costs.

  6. Isn’t it partly about data availability?

    There aren’t a lot of billionaires. Per Forbes, there are 540 billionaires in the US. Assuming a 10% response rate (probably generous) that gives you just over 50. There are almost certainly more drug dealers in Manhattan alone than that! (fewer sumo wrestlers, though)

    That study of happiness among millionaires Tyler Cowen linked to a few days ago
    https://www.hbs.edu/faculty/Pages/item.aspx?num=53540
    divided millionaires into 4 groups:
    $1-1.9 million net worth (n=993 in study 2, table 8)
    $2-4.9 million (n=654)
    $5-9.9 million (n=176)
    $10+ million net worth (n=194)
    Of course, $10 million in net worth makes you wealthy, but not super wealthy.

    (By the way, the difference in happiness scores between the groups are tiny, consistent with most earlier research that shows a fairly rapid asymptote in happiness with increasing income or net worth. Better to invest in a good relationship with your relatives.)

    And white collar criminals are probably better at covering up their crimes, or at least less willing to talk about them. When I started corporate life, they gave us basic instructions on dealing with the press: “Nobody ever got fired for saying ‘No comment.'” And that’s without having a lawyer on retainer.

    But there was quite a bit written post-2008 about the perverse incentives leading to high bond ratings for financial instruments that didn’t deserve them. The issue hasn’t been entirely ignored.

  7. President Obama, a Harvard educated lawyer who taught Constitutional Law at The University of Chicago Law School cheated when he created the DACA program. It was also cheating when he issued The Cole Memo stating that the Federal Govt. would not enforce federal marijuana laws in states that made marijuana legal. Obama was arguably the most educated President regarding The Constitution. His job as President is to enforce the laws passed by Congress. It is one thing to not be able to enforce laws for lack of resources (omission), but totally different to effectively change the laws regarding enforcement (commission) which is the object of both DACA and The Cole Memo.

    Obama did this to work around existing Congressional legislation that he did not like.

    When DACA goes in front of SCOTUS it will be thrown out and Obama from his knowledge already knew that his actions weren’t legal, but he did it anyway.

    People who rightly complain about Trump don’t seem to understand that Trump is a symptom of an underlying problem within the Democratic Party including President Obama who deliberately disregarded the law.

  8. “Why don’t economists talk more about the incentives for white-collar crime?”

    To be fair, the avarice of business people has often been pointed out in economics. In 1776, Adam Smith wrote:

    “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages”

    and

    “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public…”

    Indeed, free market economics is founded on the assumption of avarice and is the study of how a functioning economy can grow from such ugly soil. Avarice, therefore, can be said to permeate all of economics. The miracle of the free market is that a free market economy functions at all.

    But, the free marketeers took things too far after the eighties and made some people believe the free market could solve all problems at minimal cost. It can’t. There is still plenty of room for charlatanry. Your example of the pharmaceutical industry very much on point.

    • I find the last claim confusing. Nobody pays for pharmaceuticals out of pocket, unless it is over the counter. I assume you are not talking about those. Pharmaceuticals are about the opposite of free-market as you can get. Same with banking. Banks are regulated up the wazoo. The internet was the only place that was relatively unfettered due to a law passed in the late 1990s.

      • Tom’s right. We have a lot of sectors that are mixed — some capitalist parts, some governmental parts. IMO, these are the worst segments of the economy: higher education (costs rising far above inflation) and health care (ditto).

        In mixed sectors, a huge amount of the capitalist profitability depends on the actions of the governmental sector, e.g. will the drug be approved, what will reimbursement rates be like, will the government put up barriers to entry so I don’t have too much competition. This, of course, leads (at minimum!) to a lot of lobbying activities.

  9. “America’s post-Reagan treatment of business regulation”

    Actually, the post-Reagan Elder Bush era (1989-1993) was a high point of sending business executives to prison, most famously Michael Milken, but also hundreds of savings & loan executives, such as John McCain’s friend Charles Keating.

    The Younger Bush era also had a few scalps, such as some of the Enron guys from Republican circles in Houston. In the Obama years, however, you pretty much had to be Madoff to go to jail.

  10. Economists have thought about cheating since Adam Smith:

    People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

    – The Wealth of Nations, Book I, Chapter X.

  11. “We heard about the incentives that encourage real-estate agents, auto mechanics, and doctors to rip you off, but not the ways in which the legal system gives an incentive for wealthy and powerful people to break the law.”

    Actually, the Americans who receive more in benefits than pay in taxes (which is the majority) hear about that all the time. It became one of the main populist talking points. It has been one of the main talking points for the Nazis and Communists all over the world. I has been one of the pillars of Christian preaching before that.

    I think if you have many stupid laws it becomes a norm to break them , especially if you feel that you pay a lot of taxes to feed the munchers

    • It seems odd when a complex world with a complex economy in the year 2018 is described in terms of individual incentives and condescendingly to the poor as “munchers”. I do not understand how people do not recognize the need to think of the national and world economies in terms of a dynamic system rather than an exercise in individual moral decisions based on 19th century religious moralism? While individual decisions may matter, it is not the individual decisions of the “munchers” that has created a large impoverished group of people that used to be a part of the financial middle class.

      • It was a shortcut, to indicate that the populist critics of “the rich” are not exactly altruists loosing sleep over helping others. In the context, admittedly simplistic “munchers” are the counterpart of the simplistic “rich cheats”.

        I dont think munchers are “poor” either, at least not by a number of standards. For instance they often feel that they can afford having many children – something the “rich” cannot afford.

        • So if you look at an income distribution, the people who do not pay any income tax would fall where? I suppose some on the high end given their access to clever tax attorneys, but the vast majority are poor and have grown poorer over the past 2 decades thanks to wage stagnation.

          I did a search and find and you are the only blogger or commenter that has used the phrase “rich cheats”.

        • “have grown poorer ”
          It’s a fallacy. In the last 20 years the country acquired millions of illiterates who breed with reckless abandon. They haven’t “grown poorer”, they came here and brought their poverty and illiteracy with them. Not having children is a major money saver.

          I am open to being corrected, but the aggregate income distribution is not a good indication that the situation was getting worse for the actual native-born Americans.

          “I did a search and find and you are the only blogger or commenter that has used the phrase “rich cheats”.”

          It’s not the expression, it’s the idea that matters. The idea was there.

      • “it is not the individual decisions of the “munchers” that has created a large impoverished group of people that used to be a part of the financial middle class”

        Source?

        I was not aware there a large part of the financial middle class has been recently impoverished.

        Below you talk about wage stagnation. But wage stagnation means wages staying about the same, not a massive decline in real wages.

    • “Actually, the Americans who receive more in benefits than pay in taxes (which is the majority) hear about that all the time.”

      Logical link? Is it only the non-tax paying class that hears about incentives for the wealthy to break the law? Wouldn’t it be everybody? So why the sudden turn in the conversation to non-tax payers?

  12. Connecting this with incentives in statistical practice:

    Today I came across http://www.ams.org/journals/bull/2018-55-01/S0273-0979-2017-01597-2/S0273-0979-2017-01597-2.pdf, a discussion for mathematicians of the irreproducibility problem in statistics. Some quotes from the end of the article:

    “… there are many more papers giving lists of prescriptions to heal the problem than there are papers available showing scientists who are actually “walking the walk”. This is because the incentive structure has not been changed; publishing one’s data and code is costly in terms of recognition, time, and money. From experience, I know that a complete data workflow paper with a confirmatory data set takes almost a year more to publish… This is not a problem where mathematics can help, but mathematicians have set an example and a publication record where transparency is key and theorems are proved: mathematicians show their work and so should statisticians.”

    • Thanks for passing along the reference. Holmes’ paper is interesting and impressive. A favorite part of this blog is how the comments section can lead to papers or ideas I would not have come across otherwise.

  13. The Wells Fargo $25 per account is the initial $3.2 million payments. Now they will pay $110 million, 30x as much or $750 per account. Also, opening new accounts may be bad behavior, but what is the estimate of harm? How many accounts were fee generating? What were the fees? The same report by Egan says that all customers will be made whole, the lawyers will be paid, and the customers will get something extra on top of that. The small amounts per customer just reflect the small harm per customer.

    On the flip side, the extensive regulations debated in earlier comments are often separately litigated in civil suits. In those cases, the lawyers reap a disproportionate share of the settlement by working on contingency. Pro-regulations can argue the big payments provide incentives to corporations to change behavior even if the victims are not justly compensated, and anti-regulations can argue the double jeopardy of civil fines based on work by the government should be to compensate victims rather than a payout to trial lawyers.

    Add to that the lack of “loser pays” tort to discourage frivolous lawsuits, and the now cliche that the US is a highly litigious society. It’s not obvious that the sum total of the incentives are what is suggested in the simplistic framework Andrew presented. “Not obvious” does not mean wrong, but I think it suggests there is more to the story than pop-econ can easily wrap its arms around – even if Andrew’s view prevails in the end.

  14. I am such a chump.

    I took at face value the $25 per account figure and assumed it was a trivial settlement. But, as you point out, just a little digging shows the actual settlement is much higher.

    I’m the most cynical person I know, yet I constantly find I am way too trusting.

  15. “Private actors have an incentive to game the rules in their favor and find workarounds to democratic constraints, an enormous amount of resources are wasted to achieve this, and this is almost exclusively available to the wealthy” is pretty much the running theme of Public Choice, especially the regulatory capture literature. I don’t think it makes it into pop econ much because pop econ frequently tries to hide its politics. (The Median Reader Theorem?) But that’s not always the case. Dean Baker definitely writes about this stuff for a general audience.

  16. Hi Andrew,

    It’s a very strange example that you use, because it’s exactly wrong. There is a long story of white collar crime in the first chapter of Freakonomics. In fact it is right after the section on sumo wrestlers in Japan. It’s called “What the Bagel Man Saw” and (I believe) was originally published as a NY Times magazine article.

    https://mobile.nytimes.com/2004/06/06/magazine/what-the-bagel-man-saw.html?referer=https://www.google.com/

    There is no puzzle to be explained, except, perhaps, why everyone hates economists ;-)

    • Charlie:

      The bagel story is cute and it does include the phrase “white collar crime” but I don’t think it’s at all about the larger system of incentives mentioned in my post above.

  17. AG: “Why don’t economists talk more about the incentives for whit collar crime?”

    Freakonomics (literally in chapter 1, right after the sumo story)

    “He had also — quite without meaning to — designed a beautiful economic experiment. By measuring the money collected against the bagels taken, he could tell, down to the penny, just how honest his customers were. Did they steal from him? If so, what were the characteristics of a company that stole versus a company that did not? Under what circumstances did people tend to steal more, or less?

    As it happens, his accidental study provides a window onto a subject that has long stymied academics: white-collar crime. (Yes, shorting the bagel man is white-collar crime, writ however small.) Despite all the attention paid to companies like Enron, academics know very little about the practicalities of white-collar crime. The reason? There aren’t enough data.

    “A key fact of white-collar crime is that we hear about only the very slim fraction of people who are caught. Most embezzlers lead quiet and theoretically happy lives; employees who steal company property are rarely detected. With street crime, meanwhile, that is not the case. A mugging or a burglary or a murder is usually counted whether or not the criminal is caught. A street crime has a victim, who typically reports the crime to the police, which generates data, which in turn generate thousands of academic papers by criminologists, sociologists and economists. But white-collar crime presents no obvious victim. Whom, exactly, did the masters of Enron steal from? And how can you measure something if you don’t know to whom it happened, or with what frequency, or in what magnitude?”

  18. “… a legal system that’s set up to *reward* cheating”

    *Rewarding* cheating isn’t what our legal system does; it’s just not *punishing* some instances sufficiently to offset the corresponding gains from the regulated behavior itself. But those are very different!

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