THE DYNAMICS OF BUSINESS ETHICS AND ECONOMIC-ACTIVITY

We model the agency relationship between managers and investors. Throu gh socialization, ethical managers develop internalized norms which pr event them from acting opportunistically. Unethical managers lack thes e norms. Higher ethical standards on the part of managers increase eco nomic activity in the short run. However, increased economic activity increases opportunities to profit from unethical behavior, eroding eth ical standards over the long run. When this rate of erosion i.5 high, cycling of ethics and economic activity emerges. Otherwise, ethics and economic activity converge to a stable long-run limiting value.