Moral sentiments: Culture, rent seeking, and property rights

We explore society’s cultural moral code as a possible explanation of rent seeking and institutions.  At a general equilibrium level, the ethical system affects the decisions of rational agents to become moral or amoral and the subsequent extent of rent seeking.  By impacting the size of the group of moral agents, culture may also influence the strength of property rights by determining whether moral or amoral agents prevail politically.  A smaller emphasis on guilt and/or a greater emphasis on pride in society’s culture may reduce rent seeking, facilitate the establishment of stronger institutions and enhance human capital and welfare.

There may be two subgame-perfect equilibria with trembling-hand-perfect ethical choices.  In a “moral” equilibrium, the proportion of moral agents in the population is high, allowing moral agents to prevail politically and to ensure the establishment of strong property rights.  In an “amoral” equilibrium, on the other hand, amoral agents prevail, ensuring the choice of weak institutions.  The moral equilibrium is Pareto superior because less output is dissipated in rent seeking and in countermeasures, and also greater sentimental payoffs are attained.

Society’s cultural moral code ¯ the degree of emphasis on pride and guilt ¯ may shape the amount of aggregate rent seeking in a given (moral or amoral) equilibrium.  Within a given institutional framework, a greater emphasis on guilt in the ethical system leads to opposing effects on rent seeking.  The possible disutility from stronger feelings of guilt in the future discourages agents from deciding to become moral.  However, after an agent chooses to become moral, he is constrained in his rent seeking activity by stronger guilt.  Then, the former effect is always dominant.  Specifically, a greater emphasis on guilt makes moral agents (who experience guilt) worse off ceteris paribus.  Since the equilibrium payoffs of moral and amoral agents must be equal (to prevent deviation), a more guilt-based culture is associated with greater aggregate rent seeking and thus greater countermeasures by firms.  Such increased countermeasures equalize the payoff of the two ethical types by reducing the payoff of amoral agents by more than that of moral ones; the payoff of moral agents contains sentiments that are insensitive to firms’ safeguards.  Similarly, a stronger emphasis on pride reduces aggregate rent seeking and firms’ safeguarding activities in a given institutional framework.