Creative delinquency or destructive selfishness?

Abstract

We study two competing firms with different production costs and moral standards making decisions to sell their products in the market by choosing their optimal production quantities and degrees of disobedience of a guiding rule imposed by a regulatory authority such as the government. We model this problem as a Cournot–Nash game in which. We introduce rules unfairness as a behavioural factor at work. We answer the questions of why firms disobey rules and to what degree and what are the effects of such actions. Our results show that firms disobey the rules for self-interest and harm other incentives. The case when the firms’ disobediences can improve the total surplus (sum of their profits) is referred to as creative delinquency, whereas destructive selfishness refers to situation in which one’s behaviour only benefits self and leads to a decreased total surplus. Our results indicate that rules unfairness could be beneficial in some cases. Finally, our derivation of the optimal decision rules allows a regulatory authority to put into effect a coordinated punishment strategies that can benefit one firm or both firms.

Keywords:

• disobedience
• behavioural factors
• moral standard
• optimal rules
• Cournot game