Trust Your Teen, Trust Your Economy

Let’s say your 17-year old daughter wants to have a few friends over when you’re out of town overnight. Do you say:

a. No way, unless (no more than three friends, only girls, gone by 10PM, neighbor checks in, etc.) or,

b. okay, and I expect you to behave responsibly or you’ll be grounded for a month.

Which you choose may say something about how you view the issue of corporate trust and malfeasance. At the level of social trust, we broadly have two solutions to lapses in trustworthy behavior by our institutions. We can either say that:

a. left to their own devices, people will misbehave, so we must remove temptation and potential conflicts of interest; or

b. expect the best of people, grant them latitude, and impose strong sanctions against them if they do violate expectations.

(The third possibility—give them latitude, and impose weak sanctions if violated—tends to be no better social policy than it is parenting).

To put it in the broadest of terms, the first route is epitomized by Sarbanes Oxley—legislation that prevents harm by preventing temptation by preventing contact. The second route is epitomized by Elliott Spitzer (or was, while he was New York’s Attorney General)—aggressive pursuit of sanctions against those who gave in to temptation.

There are interesting anecdotal arguments in favor of each approach, and I’ll be writing about some of them in future. But one thing to note now: the sanctions route is more socially efficient, if it can be made to work. The big question is: how many social trust issues can be solved with sanctions, rather than with preventive constraints?

What do you think?