This is not the opening line of an incredibly unfunny joke.* Rather, this is an economist’s story of how Abraham Lincoln indirectly forced Lance Armstrong to come clean about cheating. It’s also the story of why detecting fraud by Wall Street bankers may prove more difficult.Economists study incentives. We know that if the price of rice goes up, the incentive to produce and supply rice increases. The same is true in the market for private information about fraud. If whistle-blowing behaviour is rewarded, the incentive to supply private information about dishonest or illegal behaviour also increases.
In The Batman Handbook, Scott Beatty sagely advises that to be as good a crime fighter as the world’s greatest detective, you need to ‘Learn everything you can in every discipline, no matter how obscure’. His list of essential subjects, however, does not include economics. This is a tragic oversight, not just because I’m saddened to hear that Batman might not have learned economic theory, but because economics suggests that Batman himself is not the solution to Gotham’s crime problem. Why? Three reasons.