Liars and Outliers by Bruce Schneier

Author:Bruce Schneier [Schneier, Bruce]
Language: eng
Format: epub, azw3, pdf
Published: 0101-01-01T00:00:00+00:00

$10,000, and the chance of her getting caught and fined is 10%, then any fine

over $100,000 will keep her cooperating (assuming she’s rational and that losing

$100,000 matters to her).

Now consider a large sandwich corporation, ALICE Foods. Because ALICE

Foods sells so many more sandwiches, its increased profit from defecting is

$1,000,000. With the same 10% probability of penalty, the fine has to be over

$10,000,000 to keep it from defecting. But there’s another issue. ALICE Foods

only has $5,000,000 in assets. For it, the maximum possible fine is everything

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Corporations 193

the corporation has. Any penalty greater than $5,000,000 can be treated as

$5,000,000. So ALICE Foods will rationally defect for any increased profit

greater than $500,000, regardless of what the fine is set at (again, assuming the

same 10% chance of being fined and no semblance of conscience).

Think of it this way. Suppose ALICE Foods makes $10,000,000 a year, but

has a 5% chance of killing lots of people (or of encountering some other event

that would bankrupt the company). Over the long run, this is a guaranteed loss-

making business. But in the short term, management can expect ten years of

profit. There is considerable incentive for the CEO to take the risk.

Of course, that incentive is counteracted by any laws that ascribe personal lia-

bility for those decisions. And the difficulty of doing the math means that many

companies won’t make these sorts of conscious decisions. But there always will

be some defectors that will.

This problem occurs more frequently as the value of defecting increases with

respect to the total value to the company. It’s much easier for a large corporation

to make many millions of dollars through breaking the law. But as long as the

maximum possible penalty to the corporation is bankruptcy, there will be illegal

activities that are perfectly rational to undertake as long as the probability of

penalty is small enough.20

Any company that is too big to fail—that the government will bail out rather

than let fail—is the beneficiary of a free insurance policy underwritten by tax-

payers. So while a normal-sized company would evaluate both the costs and

benefits of defecting, a too-big-to-fail company knows that someone else will

pick up the costs. This is a moral hazard that radically changes the risk trade-off,

and limits the effectiveness of institutional pressure.

Of course, I’m not saying that all corporations will make these calculations

and do whatever illegal activity is under consideration. There are still both moral

and reputational pressures in place that keep both individuals and corporations

from defecting. But the increasing power and scale of corporations is making

this kind of failure more likely. If you assume that penalties are reasonably cor-

related with damages—and that a company can’t buy insurance against this sort

of malfeasance—then as companies can do more damaging things, the penalties

against doing them become less effective as security measures. If a company

can adversely affect the health of tens of millions of people, or cause large-scale

environmental damage, the harm can easily dwarf the total value of the com-

pany. In a nutshell, the bigger the corporation, the greater the likelihood it could

unleash a massive catastrophe on society.

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Book 1.

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