Ethical Standards and Cultural Assimilation in Financial Services
50 Pages Posted: 21 Apr 2016 Last revised: 22 May 2017
Date Written: May 17, 2017
We study a firm with ethical employees who can adopt a profitable working practice that may harm their customers. Their response to this dilemma reflects their compensation contract as well as their ethical willpower. We identify optimal compensation contracts under utilitiarian and deontological (duty-based) ethical standards. With utilitarian employees, and irrespective of employee willpower, a profit maximising firm with sophisticated customers generates the ethically best outcome. Organizational culture emerges as an equilibrium phenomenon. If the firm is a partnership, if sales commissions are hidden, or if customers are naive, the firm may use bonuses to create a culture of malpractice.
Keywords: Culture, ethics, behavioural norms, bonuses
JEL Classification: D03, G02, G20
Suggested Citation: Suggested Citation