The Morality of Markets, by Mathias Dewatripont and Jean Tirole, in the JPE

 Are markets moral, immoral, or amoral?  Here's a new entry to that argument.

The Morality of Markets, by Mathias Dewatripont and Jean Tirole, Journal of Political Economy, online ahead of print.

Abstract: "Scholars and civil society have argued that competition erodes supplier morality. This paper establishes a robust irrelevance result, whereby intense market competition does not crowd out consequentialist ethics; it thereby issues a strong warning against the wholesale moral condemnation of markets and procompetitive institutions. Intense competition, while not altering the behavior of profitable suppliers, may, however, reduce the standards of highly ethical suppliers or not-for-profits, raising the potential need to protect the latter in the marketplace."

"The irrelevance result.—We ask: does the combination of unethical (or, more generally, UPI [unethical/present biased/influenceable]) consumers and of suppliers with consequentialist social preferences imply that moral behavior deteriorates under more intense competition? Our answer to this question is no. Indeed, under weak assumptions, the degree of competitive pressure is irrelevant to ethical behavior (moral choices are independent of demand functions) if prices are flexible.

"The intuition behind the irrelevance result goes as follows: when a supplier faces more intense competition (a more elastic demand), raising ethical behavior has a bigger negative impact on the supplier’s market share and is therefore costlier for the supplier; ceteris paribus, this makes suppliers cut ethical corners in reaction to the increase in competition, as indicated in the conventional wisdom. However, next to this first market share effect, there is a second reduced-stakes effect: a more intense competition reduces prices and markups, making supplier ethical concerns loom larger relative to material ones. We show that a sufficient condition for these two effects to exactly offset each other is that suppliers have consequentialist preferences and returns to scale are constant.

"The irrelevance result, which applies as well to ethical or indifferent consumers, is important not only because it sheds light on the validity of the widespread concern about markets expressed by the public opinion, social scientists, politicians, and religious leaders but also because it affects our stance vis-à-vis key competition-enhancing public policies, such as the opening of borders to free trade, competition policy, and the deregulation of industries. The irrelevance result is also in stark contrast with earlier theoretical results on the irrelevance of social preferences in highly competitive environments, in particular, with Dufwenberg et al. (2011) and Sobel (2015): in our case, the social preferences of suppliers and of consumers matter regardless of the competitive pressure, and it is the intensity of competition that is irrelevant. The difference is driven in particular by the fact that in their settings, one can affect others’ utilities only through one’s impact on their quantities traded or the market price, an impact that vanishes under perfect competition. In our setting, an individual may want to change her action just because it is objectionable to herself or others, even if this does not affect their ability to trade, a feature that is widespread in the real world. See the literature review for a detailed comparison."