Why do people in positions of power behave badly? A new paper shows how experimental economics can shed light on this question:
Using a laboratory experiment, we fi nd that senior workers often attempt to exploit junior workers...This occurs both when junior workers have complete information about how their effort affect the senior workers earnings, and when they have incomplete information about how their effort affects the earnings of the senior worker. These attempts, however, are more frequent and pronounced under incomplete information.
This means that the standard political response to misbehaviour by the powerful - to demand a resignation whilst maintaining basic structures of organizations - is often mistaken. As Marx said, and as subsequent research has shown, bad behaviour does not originate merely from the idiosyncratic impulses of nasty people, but rather from organizations which incentivize and facilitate bad behaviour.
But what are the organizational features that matter? These experiments suggest three inter-related things:
1. Social norms. In their experiment, there was a norm in favour of an equal division. This meant there was a default position of non-exploitative behaviour.
2. Information. Where juniors could see that they were being exploited - because they could observe seniors' pay-offs - they were empowered to resist exploitation. Not that such resistance was always necessary, because seniors - fearing it - adhered to the norm of equality in anticipation.
3. Power. The possibility of exploitation emerges because seniors have power over juniors.
It is, of course, trivial to apply this framework to Barclays' Libor fiddle. There was a social norm in favour of maximizing returns rather than for honest reporting.The process of reporting Libor was not as transparent as it could be; Libor is a hypothetical rate which in October 2008 had as much relevance to real behaviour as the price of unicorn meat. And power structures, rather than promoting honest behaviour, might even have militated against it.
The point here is that Barclays' problem was not that Bob Diamond is a bad person - the fact that he's a Chelsea fan proves that - but rather that structural pressures led to dishonesty.