Citation:
Di Tella, Rafael, Alberto Cavallo, and Aldo Sesia. "Hank and Nancy: The Subprime Crisis, the Run on Lehman and the Shadow Banks, and the Decision to Bailout Wall Street." Harvard Business School Case 718-022, October 2017. (Revised April 2019.) View Details|
Working Paper 2009 Anger and Regulation |
Abstract
We propose a model where voters experience an emotional cost when they observe a firm that has displayed insufficient concern for other people's welfare (altruism) in the process of making high profits. Even with few truly altruistic firms, an equilibrium may emerge where all firms pretend to be kind and refrain from charging "abusive" prices to their customers. Our main result is that, as competition decreases, the set of parameters for which such pooling equilibria exist becomes smaller, and firms are more likely to anger consumers. Regulation can increase welfare, for example, through fines (even if there are no changes in prices). We illustrate these gains in a monopoly setting, where regulation affects welfare through three channels: (i) a reduction in monopoly price leads to the production of units that cost less than their value to consumers (standard channel); (ii) regulation calms down existing consumers because a reduction in the profits of an "unkind" firm increases total welfare by reducing consumer anger (anger channel); and (iii) individuals who were out of the market when they were excessively angry in the unregulated market, decide to purchase once the firm is regulated, reducing the standard distortions described in the first channel (mixed channel).
Keywords: Governing Rules, Regulations, and Reforms; Consumer Behavior; Monopoly; Corporate Social Responsibility and Impact; Emotions; Welfare or Wellbeing;
Citation:
Di Tella, Rafael, and Juan Dubra. "Anger and Regulation." NBER Working Paper Series, No. 15201, August 2009.
