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Nava Ashraf and Oriana Bandiera Altruistic Capital Nava Ashraf and Oriana Bandiera Altruistic capital Article (Published version) (Refereed) Original citation: Ashraf, Nava and Bandiera, Oriana (2017) Altruistic capital. American Economic Review, 107 (5). pp. 70-75. ISSN 0002-8282 DOI: 10.1257/aer.p20171097 © 2017 American Economic Association This version available at: http://eprints.lse.ac.uk/81953/ Available in LSE Research Online: June 2017 LSE has developed LSE Research Online so that users may access research output of the School. Copyright © and Moral Rights for the papers on this site are retained by the individual authors and/or other copyright owners. Users may download and/or print one copy of any article(s) in LSE Research Online to facilitate their private study or for non-commercial research. You may not engage in further distribution of the material or use it for any profit-making activities or any commercial gain. You may freely distribute the URL (http://eprints.lse.ac.uk) of the LSE Research Online website. American Economic Review: Papers & Proceedings 2017, 107(5): 70–75 https://doi.org/10.1257/aer.p20171097 Altruistic Capital† By Nava Ashraf and Oriana Bandiera* To better understand human behavior, econ- We illustrate our ideas in an industry that is omists have enriched the private utility maxi- perceived to be highly selfish: banking. Two mization model with altruism and prosociality, observations motivate us. First, bankers affect reciprocity and fairness, identity, and values social welfare through many channels, most Akerlof and Kranton 2005; Benabou and Tirole importantly by allocating credit to productive 2003;( Besley and Ghatak 2005; Fehr and Schmidt rather than predatory or speculatory activities. 1999; Rabin 1993; Tabellini 2008 . These factors Recent events have demonstrated that getting are incorporated into preferences and,) whilst they this balance wrong can have profoundly nega- can vary across generations as parents transmit tive consequences on society. Second, the pol- values to their children Bisin and Verdier 2000; icy implications of the fixed preferences and Tabellini 2008 , they are( fixed for any given the altruistic capital model differ substantially. individual. ) Indeed if preferences are fixed, the only way This is in sharp contrast with studies in ethics aggregate altruism can change within an orga- and moral philosophy that are concerned with nization or industry is by attracting individuals the process through which virtues develop. A key with different preferences. In contrast, altruistic mechanism is that virtue is an asset that grows capital can be accumulated and shaped by policy. through righteous acts, as argued in Aristotle’s We collaborate with a global bank to pro- Nicomachean Ethics. We formalize this idea by vide evidence on two of the building blocks of introducing altruistic capital, defined as an asset the altruistic capital model. We collect data on that enables individuals to internalize the effect employees’ perceived returns to altruistic acts of their actions on others. In contrast to altruis- not their altruistic preferences using a survey tic preferences, that are fixed, altruistic capital that( covers just under 10,000 employees) across can be accumulated or depleted over time within 50 countries. We find that i returns vary sub- the same individual, and affected by policy. Our stantially+ across countries and( ) across job types; key assumption, which follows directly from ii higher returns are associated with effort Aristotle’s intuition, is that individuals accumu- devoted( ) to the prevention of financial crime—a late altruistic capital by doing altruistic acts. In high social impact activity—as well as better this framework, policies that encourage altruistic performance on their main task and their atti- behavior in the short run facilitate altruism in the tudes toward cooperation with others inside and long run and agents’ altruistic behavior depends outside the bank; and iii returns are lowest in both on their innate preferences as well as the countries where the financial( ) crisis hit the hardest. extent to which they operate in a context that Given that this is correlated with performance, encourages the accumulation of altruistic capital. the crisis might have triggered a vicious circle from low perceived returns to altruistic effort to * Ashraf: Department of Economics and Marshall lower effort to lower altruistic capital and hence Institute, London School of Economics, 32 Lincoln’s Inn even lower effort. These results suggest that pol- Fields, London WC2A 3PH e-mail: [email protected] ; ( ) icies that raise the returns to altruistic acts can Bandiera: Department of Economics and STICERD, London promote the accumulation of altruistic capital. School of Economics, 32 Lincoln’s Inn Fields, London WC2A 3PH e-mail: [email protected] . We thank Tim Besley, Rachel( Kranton, Nico Lacetera, and) especially Luigi I. Framework Zingales for useful insights; Alexia Delfino and Kim Sarnoff for research assistance; and our partners in the bank for their An individual is hired to perform a job that collaboration. † Go to https://doi.org/10.1257/aer.p20171097 to visit the comprises both private and altruistic tasks. To article page for additional materials and author disclosure illustrate in our banking context, loan officers statement s . are tasked to sell financial products and to screen ( ) 70 VOL. 107 NO. 5 ALTRUISTIC CAPITAL 71 clients for potential involvement in socially capital—like any other form of capital— harmful activities, such as prostitution rings, becomes obsolete. money laundering, or terrorism. The first is a We model the payoff of altruistic capital private task that brings revenues to the bank, the as a boost to the production of social welfare​​ second is an altruistic task that affects the wel- WaA 0, that is altruistic capital increases the fare of others in society. Agent i in every period marginal> product of altruistic effort. This cap- t​ , chooses how much effort to devote to selfish tures the idea that altruistic capital facilitates s and altruistic a tasks. Selfish tasks generate altruistic acts because, for instance, agents learn profits for the organization and yield a monetary how to spot opportunities to help others, or, in payoff for the agent Y ms while altruistic acts a model with limited attention, makes altruistic generate social welfare= according to the function acts more salient. Intuitively, individuals who W . The weight the agent puts on W depends on have been performing several altruistic acts in her social preferences ​​ i ​​​ and on the reward ​​t the past require less effort to obtain the same that the organization orσ society attaches to Wθ. result.1 Accumulating A is costly either in terms As is standard in the literature, the preference of forgone leisure or forgone monetary gains. parameter i ​​​ is individual specific, exogenous, While this depends on the exact context, the key and capturesσ both pure altruism and warm glow.​​ feature is that, akin to investments in physical t ​​​ , in contrast, is common to all individuals in and human capital, costs are incurred at time t θthe same organization and can be manipulated while a share 1 u of benefits materialize in by policy. Organizations might care about social the future.( − ) welfare by design or as a response to regulation. The marginal return to altruistic acts Banks, for instance, can be fined if found to W u a , ​A d s , ​a thus can ((σi + θt ) a ( it it ) − a ( it it )) serve clients engaged in crime and, because of be increased by changing ​​t , the reward given this, might want to incentivize their loan officers for altruism, or the slope θof the “production to be watchful. function” Wa ​​ , for example by providing evi- Agent i ’s utility at time t equals dence on how the effort of agent i affects W . A Yit i t Wit d s t , ​at where d is the key feature of this model is that, since ​​WaA 0, disutility+ (σ + ofθ work.) − The( social) welfare (produced·) the reward needed to incentivize a given level> of by agent i at time t is an increasing function of altruistic effort is decreasing in the level of altru- the effort she devotes to altruistic tasks ​​ait and istic capital. Thus, an organization only needs to her stock of altruistic capital ​​Ait : W ait , Ait . provide strong incentives high until A is suf- Following Solow 1995 and Guiso, Sapienza,( ) ficiently high. ( θ) and Zingales 2010( we) use the term “capital” to describe a durable( ) factor that i can be mea- II. Measuring the Returns to Altruism sured; ii requires costly actions( )in the present to produce( ) benefits in the future; and iii has a The framework has two building blocks: i precise mechanism through which it is( accumu) - that returns to altruistic effort, and hence the( ) lated and depleted. choice to put forth effort, depend on context Starting with the latter, we assume that altru- specific factors that can be shaped by policy and istic capital grows proportionally to the effort exogenous events, ii that altruistic effort today devoted to altruistic tasks as virtue in Aristotle’s leads to the accumulation( ) of altruistic capital quote. Following Lucas’ 1988 model of human that increases the returns to altruistic effort in capital accumulation, we( assume) that a share u the future. We now show evidence on i and of the effort devoted to altruistic tasks increases briefly discuss ii in the conclusion. ( ) social welfare directly in the period it is exerted ( ) while the remaining 1 u increases altruistic capital in the next period.− The accumulation of altruistic capital is therefore not deliberate, but rather a by-product of altruistic acts. This cap- tures Aristotle’s idea that righteous acts build “virtue.” Altruistic capital in period t can then 1 Alternatively one could assume that the cost of devoting be measured as ​​A t 1 u a t 1 1 A t 1 effort to altruistic tasks is decreasing in A ; these two formu- = ( − ) − + ( − δ) − where is the depreciation rate, as altruistic lations are equivalent.
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