What Affects the Level of Honesty in an Economy?

Abstract

This paper focuses on questions such as what determines the societal level of honesty (that is, the proportion of honest individuals in the economy), and why some economies may be more honest, or less honest, than others. A central feature of our model is that an individual’s (Bayesian) behavior (to be honest or dishonest) is influenced by his own past experiences which, in turn, are determined by the behavior of others. Therefore, honesty encourages honesty, whereas dishonesty encourages dishonesty. Our formal analysis is conducted within an overlapping generations framework, in which individuals live for a finite amount of time, but the society is a going concern.

We show that there can be dishonesty in an economy even if the youngest generation is entirely honest, and that there can be honesty in an economy even if the youngest generation is entirely dishonest. We predict the effects (on the level of honesty) of parameters representing the characteristics of individuals and the economy. For instance, if the youngest generation believes that the level of honesty in the economy is higher then, indeed, the actual level of honesty is higher. In addition, we have been able to delineate intuitive conditions under which an economy is less honest (or more honest) if people live longer, and under which older persons are less honest (or more honest) than the younger ones.