When a finger in the dike floods the plains: closing loopholes can increase subversion of the law

The first of the Trinity term's R:ETRO - Reputation: Ethics, Trust, and Relationships at Oxford - seminar series.

Celia Moore, Professor of Organisational Behaviour, Imperial College Business School, was the guest speaker for the seminar hosted by Alan Morrison, Professor of Law and Finance, and Rita Mota, Intesa Sanpaolo Research Fellow, as part of the R:ETRO seminar series.

The prevalence with which individuals and firms circumvent the law is perplexing, as laws, rules, and regulations have both proliferated and become increasingly specific in efforts to curtail this type of misconduct more effectively. Combining insights from the literature on ethical decision-making and diffusion with threshold models of collective behaviour, we offer a novel explanation for this puzzle. Using a simulation model, we show how closing avenues through which individuals and firms circumvent the law (use 'loopholes') can backfire, sometimes spectacularly so.

When a loophole is closed, the repertoire of subversive practices an agent can adopt safely shrinks. As a consequence, when a subversive agent chooses to use a different loophole that achieves the same end, more honourable agents observe others using those remaining loopholes at higher rates, which makes the honourable agents more likely to adopt the subversive practice themselves. We demonstrate that this can lead to a runaway process wherein the likelihood of widespread subversion can increase as the number of loopholes diminishes.