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Do banks crowd in or out business ethics? An indirect evolutionary analysis

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  • Güth, Werner

Abstract

The evolution of trustworthiness as a major aspect of business ethics depends crucially on whether it can be signaled. If this is impossible, only opportunistic traders will survive. Whereas previous studies have analysed detection agencies (Güth and Kliemt, 1994 and 1998) or have substituted signaling by ex post-punishment, e.g. in the form of courts (Brennan, Güth, Kliemt, 1997a and b), we here introduce the institution of banks which can guarantee payment. It is shown that this can crowd in trustworthiness, i.e. trustworthy traders can survive in the evolutionary race. Compared to detection agencies the result may, however, be both, crowding out and crowding in of business ethics. The crucial feature is the bank's ability to discriminate between trustworthy and unreliable debtors which, in our model, is formally captured by the probability difference of accepting their respective credit applications.

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  • Güth, Werner, 1998. "Do banks crowd in or out business ethics? An indirect evolutionary analysis," SFB 373 Discussion Papers 1998,40, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
    • Handle: RePEc:zbw:sfb373:199840
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    1. John C. Harsanyi & Reinhard Selten, 1988. "A General Theory of Equilibrium Selection in Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262582384, December.
    2. Güth, W. & Kliemt, H., 1993. "Competition or Co-Operation," Discussion Paper 1993-39, Tilburg University, Center for Economic Research.
    3. Guth, Werner & Peleg, Bezalel, 1996. "On ring formation in auctions," Mathematical Social Sciences, Elsevier, vol. 32(1), pages 1-37, August.
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    5. Selten, Reinhard, 1988. "Evolutionary stability in extensive two-person games - correction and further development," Mathematical Social Sciences, Elsevier, vol. 16(3), pages 223-266, December.
    6. Brennan, Geoffrey & Güth, Werner & Kliemt, Hartmut, 1997. "Trust in the shadow of the courts if judges are no better," SFB 373 Discussion Papers 1997,44, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
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