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Voting with the wallet

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Abstract

The vote with the wallet is a new, emerging feature of economic participation and democracy in the globally integrated market economy. This expression identifies the pivotal role that responsible consumption and investment can play in addressing social and environmental emergencies which have been aggravated by the asymmetry of power between domestic institutions and global corporations. In this paper, we examine (both in general and by using examples drawn from the financial and non-financial sectors) how “voting” for producers which are at the forefront of a three-sided efficiency which reconciles the creation of economic value with social and environmental responsibility may generate contagion effects by triggering ethical imitation of traditional profit-maximizing actors, thereby enhancing the production of positive social and environmental externalities. Within this new framework, policies that reduce the search and information costs of voting with the wallet may help socioeconomic systems to exploit the bottom-up market forces of other-regarding preferences, thereby enhancing opportunities to achieve well-being with reduced top-down government intervention.

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Notes

  1. The issue has been dealt with, not without a certain amount of irony, by a number of well-known social scientists: Hayek called homo economicus the “family shame,” and Frank stated that he would not let his daughter date a homo economicus.

  2. A further paradox is that when facing social dilemmas even game theorists do not follow Nash rationality (see Becker et al. 2005 findings on the traveler’s dilemma).

  3. The multifarious concept of social capital includes trust and is defined in the literature in different ways. Putnam (1993:167) defines it as “social organization, such as trust, norms, and networks that can improve the efficiency of society by facilitating coordinated actions,” while Guiso et al. (2008) define it as “the set of beliefs and values that foster cooperation.” According to Hong and Bohnet (2007), “trust… consists of the investor’s willingness to make herself vulnerable to others’ actions,” while Fehr (2009) argues that “an individual (let’s call her the trustor or investor) trusts if she voluntarily places resources at disposal of another party (the trustee) without any legal commitment from the latter”.

  4. Keynes (1931, Ch. 5).

  5. Examples of this are the constant financial scandals (Societé Generale, Madoff, Parmalat, Enron) of recent years.

  6. Three essential references on asymmetric information are those of the three authors who jointly received the Nobel Prize for research in this field: Akerlof (1982) for moral hazard and the market for lemons, Stiglitz for efficiency wages in labour markets (Shapiro and Stiglitz 1984), and Spence (1973) for signalling models.

  7. See, among others, consumer surveys from Italy (IREF), the UK (Bird and Hughes 1997) and Belgium (De Pelsmacker et al. 2005).

  8. The kidney sale described above is, in fact, perfectly compatible with the Edgeworth box structure, with the only peculiar feature being that the endowment point is extremely close to the origin of the axis of one of the two transactors (meaning that the endowments with which the two agents arrive in the market are quite unequal).

  9. Note that, in order to examine the effect of this action in depth, we need to abandon the static analytical framework of the Edgeworth box. This is because any static analytical framework tends to fix individuals to their starting conditions, while only dynamic approaches may allow us to understand that policies of inclusion and promotion of equal opportunities may be dynamically convenient, even though they may appear statically inefficient (see also Sect. 3.1 and the theoretical fair trade debate on this point).

  10. According to the IFAT (the main international organization that gathers together producers and fair trade organizations), these criteria are as follows: (1) creating opportunities for economically disadvantaged producers; (2) transparency and accountability; (3) capacity building; (4) promoting fair trade; (5) payment of a fair price; (6) gender equity; and (7) working conditions (a healthy working environment for producers. The participation of children, if any, does not adversely affect their well-being, security, educational requirements and need for play, and conforms to the UN Convention on the Rights of the Child, as well as the law and norms in the local context); (8) the environment; (9) trade relations (fair trade organizations trade with concern for the social, economic and environmental well-being of marginalized small producers and do not maximize profit at their expense. They maintain long-term relationships based on solidarity, trust and mutual respect that contribute to the promotion and growth of fair trade. Whenever possible, producers are assisted with access to pre-harvest or pre-production advance payment).

  11. Consumers International (2010).

  12. “Fair trade has played a pioneering role in illuminating issues of responsibility and solidarity, which has impacted other operators and prompted the emergence of other sustainability regimes. Trade-related private sustainability initiatives use various social or environmental auditing standards, which have grown in number and market share.” (EU Commission 2009).

  13. The industrial organization literature models competition in CSR by considering the latter an additional feature of the product (see, among others, Bagnoli and Watts 2003; Arora and Gangopadhyay 1995).

  14. From http://icba.free.fr/IMG/pdf/G_20_MARCH_09.pdf, accessed April 30, 2009).

  15. Banca Etica in Italy is an example of this new vintage of ethical banks. According to its charter of principles, the bank’s goal is to use its resources to finance projects with the highest social and environmental value after satisfaction of the economic feasibility constraint. As a result of this goal, the bank earned an ethical premium from investors who demonstrated that they were willing to finance it at below market rates. The value of the “ethical premium” became clear in the passage from book to market accounting (with the introduction of International Accounting Standards in 2007), where the bank’s expected future revenues were discounted at a lower rate, leading to extraordinary profits. The Banca Etica model has been followed in Europe by other banks such as Triodos Bank (124 million euros of equity capital, 1.36 billion euros of savings), GLS Gemeinshaftsbank (35.5 million euros of equity capital and 567.8 million euros of savings) and Umwelbank (5.1 million euros of equity capital and 515.8 million euros of savings). Exactly as discussed in the fair trade section, the emergence of socially responsible pioneers in the financial industry and the consensus offered to them by “concerned” investors have caused a contagion effect on profit-maximising incumbents. One example of this has been the creation of Banca Prossima by Intesa-San Paolo, the second largest Italian bank, with characteristics that are very similar to those of Banca Etica.

  16. To provide an extreme example, Kiva (http://www.kiva.org/) is an electronic platform by which anyone can lend small sums “directly” to poor, uncollateralized borrowers on the basis of a simple promise of restitution of the sum without interest. Kiva has been extremely successful in pooling small sums from all over the world and channeling them without extra cost to its network of potential borrowers.

  17. Becchetti and Conzo (2011) use a randomized field experiment to document a self-reinforcing effect of microfinance on loan solvency which contributes to explaining its performance. They show that the granting of a loan by the MFI may act as an indication of the borrowers’ trustworthiness in their local communities, thereby increasing their reputation and payoffs from business activities.

  18. EU Commission (2001).

  19. One definition of intrinsic motivation is provided by Deci (1975), who argues that “one is said to be intrinsically motivated to perform an activity when he receives no apparent reward except the activity itself.” A more recent extended definition by Deci and Ryan (2000) runs as follows: “perhaps no single phenomenon reflects the positive potential of human nature as much as intrinsic motivation, the inherent tendency to seek out novelty and challenges, to extend and exercise one's capacities, to explore and to learn. … The construct of intrinsic motivation describes this natural inclination toward assimilation, mastery, spontaneous interest and exploration that is so essential to cognitive and social development and that represents a principal source of enjoyment and vitality throughout life”.

  20. Empirical research on the drivers of life satisfaction has boomed in recent decades since the wide availability of new data has for the first time allowed economists to test their hypotheses on arguments of individual utility functions directly. In spite of several methodological problems (lack of cardinality and limitations in the interpersonal and inter-country comparability of life satisfaction values), this literature has produced an incredibly consistent set of “stylized facts” and a number of checks that document their reliability. The life satisfaction literature has found discrepancies between subjective and objective well-being and provided new methods for measuring the shadow value of non-marked goods (for a survey, see, among others, Frey and Stutzer 2002, 2010; Clark et al. 2006).

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Acknowledgments

I thank F. Adriani, S. Anderson, M. Bagella, K Basu, L.Bruni, F. Bourguignon, R. Cellini, L. Debenedictis, T. Ellingsen, M. Fenoaltea, P. Garella, B.Gui, I. Hasan, B. Huybrechts, L. Lambertini, S. Martin, C. McIntosh, T. Picketti, P.Porta, N. Phelps, G. Piga, P. Scaramozzino, L. Sacconi, F. Silva, L. Stanca, M. E. Tessitore, P. Wachtel, C. Whilborg, H. White, B. Wydick, S. Zamagni and all participants in seminars held at the XV Villa Mondragone Conference, at SOAS in London, at the Copenhagen Business School and the Universities of Catania, Bologna, Macerata and Milano Bicocca, and at the 2008 Poverty and growth network conference in Accra for the useful comments and suggestions received. The usual disclaimer applies.

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  1. Facoltà di Economia, Dipartimento di Economia e Istituzioni, Università di Roma Tor Vergata, Via Columbia 2, 00133, Rome, Italy

    Leonardo Becchetti

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Becchetti, L. Voting with the wallet. Int Rev Econ 59, 245–268 (2012). https://doi.org/10.1007/s12232-012-0166-9

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