Abstract
The social level of honesty is a public good that determines the feasibility of ventures subject to opportunism and the amount of resources devoted to safeguarding such activities. This paper examines equilibrium honesty in an evolutionary model where safeguards exhibit diminishing returns. The analysis shows that honesty-promoting policies, such as public provision and subsidization of safeguards, financed by uniform taxes, increase social welfare. By contrast, sharply increased safeguard costs, e.g. soaring litigation costs, may initiate a process of disintegration of honesty in society. Furthermore, hysteresis makes re-establishing honesty likely to be very costly. (C)1997 Elsevier Science S.A.