Restoring trust in finance: Competition or moral motivation?
We outline a narrative of changing attitudes to social responsibility by managers in the finance industry, in response to bonus-based compensation crowding out other-regarding preferences (Simpson, 2016). We attribute part of the motivation crowding out to their mode of thinking, namely simple utility maximization, conceived of as a norm promoting individual financial reward. We decompose the resultant loss in consumer surplus into the sum of a cost of commitment incurred by managers when they voluntarily eschew monopoly (Sen, 1976) plus the deadweight loss to the economy when they do not. Disciplining managers unwilling to pay the cost of commitment by competition policy runs into serious difficulties which are prominent in the finance industry: the longevity of poorly performing firms, information opacity and rent ubiquity. The practical difficulties of competition policy make it correspondingly important to directly address the moral motivations of bank executives.
Gordon Menzies is Associate Professor with the University of Technology Sydney. After an undergraduate degree in econometrics, he had over a decade experience with the Australian central bank. He was sponsored by the bank to complete a masters at the Australian National University, where he won a prize for the best student. ANU subsequently nominated him for a Commonwealth scholarship to Oxford, where he studied under David Vines and Donald Hay on the Asian Financial Crisis. He holds numerous teaching awards and the 2009 Arrow Senior Prize for the best economics paper in the Berkeley Electronic Press. He is a visitor to the PEFM group at St Antony’s college and the Oxford Martin School. In Australia he is the deputy director of the Paul Woolley Centre for the Study of Capital Market Dysfunctionality.