The Corporate Legality Game. A Lab Experiment on the Impact of Policies, Frames and Information

A company that pursues illicit practices (e.g., money laundering, tax dodging, corruption of public officials in procurement races, etc.) may underprice and crowd out competitors that behave legally, thereby eroding the public good of legality and integrity. Recently born institutional legality ratings tackle this problem by signaling companies with excellent legality record to consumers. Redistributive policy actions aimed to tax “defectors” (i.e. buyers of unrated products) in favor of “co-operators” (i.e. buyers of “legality-rated” products) may further enforce legality, and fight corruption. We analyze the impact of the legality-rating frame by means of a randomized experiment. The experiment accounts for the effects of fiscal policies that redistribute income from defectors to co-operators either in presence or in absence of the legality frame. Our findings document that the redistribution mechanism, the legality frame and the conformity information design contribute to alleviate the prisoner’s dilemma and generate significant deviations from the Nash Equilibrium.