Crowd wisdom economics: The bad news

May 29, 2013

(Phys.org) —Volkswagen is simply a better car company than Fiat. Profits are higher, and so are wages. Why doesn't Fiat just be like VW? Why doesn't Italy, for that matter, emulate Germany? Is it elites that perpetuate lousy economic institutions and unhelpful social norms? Or is it the weight of tradition? Or maybe people are just dumb.

Maybe none of the above: Even the most rational people often persist in perpetuating a status quo that leaves everyone worse off. That is the message of a new paper published in the American Economic Review by Marianna Belloc (Sapienza University, Rome) and SFI Professor Samuel Bowles.

The researchers show that groups of people can get stuck in a bad situation because nobody has an incentive to make a change unless most of the others also make the move. At Volkswagen, managers share decision making with workers and workers work cooperatively, to everyone's benefit. At Fiat, managers make all the decisions, and workers take an aggressive stance toward their managers.

"As long as managers at Fiat act like control freaks, workers have no incentive to cooperate," Bowles explains, "and as long as are ready to hit the barricades at the drop of a hat, managers have little incentive to give them a seat at the table." Belloc and Bowles provide a of how dysfunctional institutions and cultures can persist indefinitely in these vicious circles. Their work is part of SFI's ongoing research on the of institutions and behaviors, the topic of a regular series of SFI working groups.

Change for the better can happen, the researchers show, when enough people just refuse to conform to the status quo. But those who do this lose economically by stepping out. Think: Rosa Parks. And unless the deviants get together, it can be a long wait until this happens; longer still the more intent people are on maximizing their own gains.

And there's news for those who believe a rising tide lifts all boats: trade liberalization will slow the transition to a better situation.

Belloc explains: "Even in a lousy status quo, the economic gains from mean that it makes less sense to risk losing out by swimming against the current."

Explore further: Corruption influences migration of skilled workers

More information: www.aeaweb.org/articles.php?hs=1&fnd=s&doi=10.1257/aer.103.3.93

add to favorites email to friend print save as pdf

Related Stories

New study offers insight into how to best manage workaholics

May 22, 2013

(Phys.org) —Workaholics tend to live in extremes, with great job satisfaction and creativity on the one hand and high levels of frustration and exhaustion on the other hand. Now, a new Florida State University study offers ...

Recommended for you

Bloody souvenir not from decapitated French king: DNA

19 hours ago

Two centuries after the French people beheaded King Louis XVI and dipped their handkerchiefs in his blood, DNA analysis has thrown new doubt on the authenticity of one such rag kept as a morbid souvenir.

User comments : 0

More news stories

Google+ boss leaving the company

The executive credited with bringing the Google+ social network to life is leaving the Internet colossus after playing a key role there for nearly eight years.