The Economics of Ethics, or Vice Versa


New York – To say that asset managers are nervous about the insider trading cases is an understatement. It has become clear that money managers are on high-alert in regard to the potential for inside information to be shared in the investment research process.  Firms that have any contact with company management are being viewed circumspectly alongside expert network firms and other primary research styles. Additionally, an industry consultant might have inside information on a particular company, through a consulting engagement, or a fundamental analyst might have access to insider information through close contacts in the industry.

But seemingly passing through the sublime – ridiculous barrier is a recent letter sent to the American Economic Association urging the organization to establish a code of ethics for economists. At this juncture there is ample opportunity for economist jokes, but we will let the reader recall his/her own favorite. Economists have trouble distinguishing between endogenous and exogenous variables, generally opting to make assumptions, rather than execute primary research. So it seems odd that there is a move afoot to provide greater disclosure.

In reality, though, the issue that is being discussed in the letter is quite different than the insider trading debacle that is affecting money managers, and relates to economists being transparent about their consulting engagements, when, for example, testifying to the House Finance Committee or the Senate Banking Committee on particular issues. There are certainly some issues if an economist consults for a bulge bracket firm on derivative securities and then provides testimony to Congress on potential financial legislation regarding derivatives.

The letter is motivated by a study done by Gerald Epstein and Jessica Carrick-Hagenbarth (U. Mass Amherst) that found that of 19 economists that participated in recent public policy debates, 13 had private financial affiliations which could be construed as conflicted. In light of this, it seems that economists that are contributing to the debate on regulation and legislation have an obligation to reveal their current affiliations and potential conflicts in that process.

So while the proposal to create a code of ethics for economists seems silly on the surface, a formal document providing the need to disclose potential conflicts is probably a needed element in the realm of economic research.  The jury is still out as to whether by placing a number of economists end-to-end, they could reach a conclusion.


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