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Study Suggests Rules Requiring Minimum Standards Lower Standards to the Minimum

Tom RietzRules that are supposed to ensure minimum standards may in the end serve only to lower standards further than they might be without any rules at all, according to a study by a University of Iowa researcher.

Tom Rietz, professor of finance in the Tippie College of Business, speculates that this is because rules put in place to ensure minimum standards unwittingly establish a "good enough" level, so that people will perform only what is minimally needed.

"Rules may serve to calibrate expectations indicating what actions are good enough and, as a result, behavior may effectively fall to the rule," Rietz said. "People who on their own initiative may have gone above and beyond instead do only the minimum."

For example, he said free-will offerings might generate more admission income at a charity event than an established entry fee. Or, at a larger level, minimum wage laws may actually reduce overall wages in some situations because employers that might otherwise pay more instead pay only what the law requires them to.

Rietz said that minimum rules may also create a lack of trust between two parties in a relationship because it eliminates the benefit of the doubt. This is important, he said, because "social contracts commonly depend on trusting and reciprocating relationships. In modern economies, these relationships determine outcomes in conjunction with formal rules and explicit contracting."

Take out that trust, he says, and societies and economies function less efficiently. In some ways, rules are put in place with the expectation that a guaranteed minimal level of performance will increase trust by reducing the risk to both parties and raising standards across the board. But recent experiments and studies have been calling into question the assumption.

Rietz's experiment involved groups of 18 to 24 subjects who were paired off. One of the people in each pair—an "Investor"—was given $10, any amount of which could be given to the second person, the "Trustee." Whatever was given was then tripled, and the Trustee could return any portion of that tripled amount to the Investor.

In some of the pairings, there were no rules dictating how much money Trustees had to return to Investors. With other pairs, Trustees were required to return a minimum of 10 percent, 20 percent or 30 percent to Investors.

The results showed that when there were no minimum return rules, the average Trustee returned 35 percent of the tripled amount to the Investor. But when a 10 percent minimum return rule was put in place, that median amount returned dropped to 10 percent, with 57 percent of Trustees returning only the minimum. Rietz said this is an indication that typical Trustees are no longer trustworthy in the sense that they don't return more than the minimum.

While returns rise mechanically with 20 and 30 percent minimum return rules, Rietz said there is no evidence that trust returns between the two people.

"Without minimum return rules, trustees have to decide how much to return based on their own expectations about the value of information and what should be done in context," Rietz said. "Rules restrict their ability to show trustworthiness through voluntary discretionary reciprocity."

Minimum return rules also influenced how much Investors would initially send to Trustees. With no rules, Investors typically send about half of their $10, a figure that went down as minimum rules were put in place.

Rietz's paper, "Trust Reciprocity and Rules," was co-authored with Eric Schniter, Roman M. Sheremeta, and Timothy W. Shields of Chapman University.


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