The Eroding Trust in Capitalism and its Consequences for Law

21 Pages Posted: 5 Nov 2009 Last revised: 5 Jan 2010

See all articles by Christoph Engel

Christoph Engel

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods; University of Bonn - Faculty of Law & Economics; Erasmus University Rotterdam (EUR), Erasmus School of Law, Rotterdam Institute of Law and Economics, Students; Universität Osnabrück - Faculty of Law

Date Written: November 1, 2009

Abstract

On both sides of the Atlantic, legislators consider a cap on manager income. As a redistributive intervention, the cap would be misplaced. It affects such a small number of persons that the effect on the Gini coefficient would be negligible. Redistribution is, however, not the raison d’être of the rule. The public perceives a very high yearly income of some as a signal for a lack of solidarity in society, especially if recipients are responsible for low wages or even unemployment of many. Based on demoscopic data from Germany, this article shows that generalised trust in capitalism has indeed severely suffered. It explains why this is troublesome news for the legal order. From this starting point, it discusses the justification of a cap on manager income, despite the fact that the German constitution (unlike the US Lochner jurisprudence) in principle protects economic freedom of managers, firms and stockowners. While it cannot offer a strict proof that manager income works as a signal, if offers a piece of indirect evidence. By way of regression analysis, it shows that the Gini coefficient explains interviewees’ assessment of the justice of capitalism very well, once one controls for the unemployment rate in the year in question, plus the interaction between both explanatory variables.

Note: Paper is downloadable in German.

Keywords: cap on manager income, generalised trust in capitalism, Gini coefficient, limits to interventions into fundamental freedoms, unemployment rate

JEL Classification: G34, J31, K22, L22, P10

Suggested Citation

Engel, Christoph, The Eroding Trust in Capitalism and its Consequences for Law (November 1, 2009). MPI Collective Goods Preprint, No. 2009/37. Available at SSRN: https://ssrn.com/abstract=1500319 or http://dx.doi.org/10.2139/ssrn.1500319

Christoph Engel (Contact Author)

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods ( email )

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University of Bonn - Faculty of Law & Economics

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Erasmus University Rotterdam (EUR), Erasmus School of Law, Rotterdam Institute of Law and Economics, Students ( email )

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Universität Osnabrück - Faculty of Law

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