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Ethical standards and cultural assimilation in financial services

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  • Thanassoulis, John
  • Morrison, Alan

Abstract

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 utilitarian 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.

Suggested Citation

  • Thanassoulis, John & Morrison, Alan, 2017. "Ethical standards and cultural assimilation in financial services," CEPR Discussion Papers 12060, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:12060
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    References listed on IDEAS

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    Cited by:

    1. Thanassoulis, John, 2018. "The I.O. of ethics and cheating when consumers do not have rational expectations," CEPR Discussion Papers 13172, C.E.P.R. Discussion Papers.
    2. Song, Fenghua & Thakor, Anjan, 2022. "Ethics, capital and talent competition in banking," Journal of Financial Intermediation, Elsevier, vol. 52(C).

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    More about this item

    Keywords

    Culture; Ethics; Behavioural norms; Bonuses;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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