When a finger in the dike floods the plains: closing loopholes can increase subversion of the law

This webinar will be hosted via Zoom, please register using the link.

The prevalence with which individuals and firms circumvent the law is perplexing, as laws, rules, and regulations have both proliferated and become increasingly specific in efforts to curtail this type of misconduct more effectively. Combining insights from the literature on ethical decision-making and diffusion with threshold models of collective behavior, we offer a novel explanation for this puzzle. Using a simulation model, we show how closing avenues through which individuals and firms circumvent the law (use “loopholes”) can backfire, sometimes spectacularly so.

When a loophole is closed, the repertoire of subversive practices an agent can adopt safely shrinks. As a consequence, when a subversive agent chooses to use a different loophole that achieves the same end, more honorable agents observe others using those remaining loopholes at higher rates, which makes the honorable agents more likely to adopt the subversive practice themselves. We demonstrate that this can lead to a runaway process wherein the likelihood of widespread subversion can increase as the number of loopholes diminishes.