Forensic Economics: The Ethical Dilemma of Information Competiton

by Charles C. Fischer

Charles C. Fischer is a Professor in and the Chair of the Department of Economics, Finance, and Banking, Pittsburg State University. He is also the Editor-in-Chief of the Journal of Managerial Issues.

In the wake of recent high-profile criminal cases critically involving forensic investigation and testimony, like the O. J. Simpson case, concerns regarding the credibility, competence, and ethics of forensic experts have been voiced by analysts and the media. Are forensic experts merely "hired guns?" This article explores this question with respect to one important area of forensics, namely economics. [This article draws from and builds upon related works by Fischer 1987, 1991, 1992, 1993.] The ethics of forensic economics has been subject to critical attack within the profession itself. [e.g., Berg 1987, Havilresky 1989, Fox 1991, Johnson 1995, Depperschmidt 1994]

Given the entrepreneurial nature of forensic economics, a market perspective is taken in this study. The ethics of forensic economics is examined in terms of qualitative market failure. First, the notion of ethical behavior is explored as it applies to forensic economics. This is followed by an examination of qualitative market performance in forensic economics. From this examination, the ethics of forensic economics is evaluated. The article closes with some proposals aimed at strengthening the ethical performance of forensic economics.

The Ethics of Forensic Economics

Ethical behavior, regardless of the realm of application, concerns the moral precepts of a particular culture. [Kanne, 1988] For example, in our culture ethical behavior may be cast in terms of "serving the public interest." [Purcell, 198] From a religious perspective, there is the concept of "do unto others...." [Purcell, 1982] Such cultural and/or religious connotations of ethical behavior have intuitive appeal but lack operational robustness in a competitive market environment. However, an operational concept of ethical behavior is problematic since disagreement exists over what constitutes ideal ethical behavior in a particular situation. [McKee, 1979 and 1987] In an attempt to resolve this problem, an ethical code of conduct may be prescribed. [Jamal and Bowie, 1995] For example, there is the Rotary Club's "four way test of the things we think, do or say" [Hattwick, 1985]: (1) Is it the truth?, (2) Is it fair to all concerned?, (3) Will it build good will and better friendships?, and (4) Will it be beneficial to all concerned?

Forensic associations have taken such an approach by adopting a code of ethical conduct for their members. The American College of Forensic Examiners [1995] has adopted the following code:

The National Association of Forensic Economics has adopted a similar code [National Forensic Center, 1989] as illustrated by the following excerpts:

...decline involvement in any litigation where I am asked to take or support a predetermined position.... Whether I am engaged by the plaintiff or the defense, my approach, methodology and conclusions should, in the end, be essentially the same. ...provide my employing attorney with the full benefit of my knowledge regardless of how it may affect the outcome of the case.

Such codes of ethical conduct, though containing some ambiguity, provide a reasonably good operational framework for guiding the behavior of individuals. They set forth what should be done ideally. However, a code of ethical conduct, naturally, cannot guarantee compliance by individuals. Some professions have attempted to enforce their code of ethical behavior through professional control mechanisms, primarily certification and decertification processes. [Johnson, 1991a and 1991b] However, in forensic economics there are no professional enforcement mechanisms, and evidence points to strong resistance within the profession to professional control. [Brookshire and Slesnick, 1991]

An important alternative to institutional control, such as professional certification, is market discipline. In forensic economics, where institutional control is lacking, a critical issue is whether the market for forensic economics is an effective discipline mechanism. Can the market be relied upon to ensure the ethical behavior of forensic economists? And, if not, what can be done to enhance the ethicality of the profession. These key issues are the focus of the remainder of this article.

Qualitative Market Failure

Economists speak of market failure as "the failure of a more or less idealized system of price-market institutions to sustain desirable' activities, or to stop undesirable' activities." [Bator, 1958, 351]. Market failure may be quantitative and/or qualitative. The quantitative test of market performance is optimal private production, which calls for exclusivity and rivalry in consumption. [see, for example, Desperez and Milberg 1990] If consumption is nonexclusive, private, for-profit production will not occur. If consumption is exclusive, but nonrival in consumption, private production will not be optimal. Thus, quantitative market failure concerns whether private, for-profit producers have adequate incentive to produce a good or service, and in the optimal amount.

Qualitative market failure, on the other hand, exists when producer output lacks the desired qualitative characteristics. In the case of forensic economics, a "desirable" qualitative market outcome is the ethical behavior of forensic economists, as specified by an ethical code of conduct.

Key factors determining the qualitative response of a market are ease of supplier entry (and exit), consumer choice, buyer-seller relationship, and information competition. [see, for example, Akerlof 1970, Gomez-Ibanez and Kalt 1990] Each is examined below with respect to the qualitative competitiveness of the market for forensic economics. Implications are then drawn regarding the ability of the market to discipline unethical behavior.

In assessing the market for forensic economics, it is important to understand the relationship between ethicality and market efficiency. From the time of Adam Smith, orthodox economists have recognized that socially efficient market outcomes do not depend upon the ethical intent of the parties. Market discipline will, as an "invisible hand," take care of that. In competitive markets, ethical intent is not necessary for market efficiency. However, if markets are not sufficiently competitive, then the ethicality of the parties is both relevant and problematic for market performance outcomes.

Strengthening the Market

In this section, we look at ways ethicality may be addressed from a market perspective. The goal is to improve the qualitative/ethical performance of the market via market policies. But, it should be noted that some favor nonmarket approaches instead. [Johnson, 1991a and 1991b] The two most common are: (1) professional certification, and (2) enforcement of an ethical code of behavior. [Bayles, 1989] These are natural complements in that the goal of professional certification is to set and promote professional qualitative standards, which, in turn, begs the enforcement issue.

The reason for taking a market approach here is essentially twofold. One, as mentioned above, current (preliminary) evidence suggests strong resistance to institutional intervention by forensic economists in this country. [Brookshire and Slesnick, 1991] Second, market approaches have the appeal of treating the problem itself (while institutional responses tend to be more symptom oriented), and being self-enforcing via the discipline of the market. Critics, however, argue that markets are incapable of satisfactorily addressing ethical issues, and that direct institutional intervention is called for. [e.g., Johnson 1991a and 1991b] While this important debate is beyond the scope of this article and will not be settled soon, it seems safe to conclude that market policies will remain an important part of the search for improving the ethicality of forensic economics.

Two market approaches are set forth below, namely restructuring the trial process and third-party assistance. Both are aimed at enhancing the qualitative performance of the market in terms of an ethical code of conduct.


The integrity of forensic economics is an important issue for forensic economists, the parties at dispute, and society at large. The credibility of any area of forensics is critically linked to its ethicality. If forensic experts are commonly viewed as "hired guns," then their testimony in court will have little impact on the outcome and will be seen as nothing more than a charade. This would be tragic, for critical forensic evidence would be lost in the trial process.

The parties involved also have a big stake in the integrity of forensics. Economic damages awarded by the courts can run in the millions of dollars and thus dramatically affect the financial interests of the parties. Unethical behavior compromises those interests.

Finally, society must be concerned with the ethicality of the profession, for often it is the general consumer and/or taxpayer who pays for inflated economic awards. A dramatic example of this problem relates to the recent sharp increase in wrongful death awards under hedonic damage methodologies. [see 1991, Havrilesky 1995] Usually, these awards are paid for via increased insurance premiums (e.g., auto, medical malpractice). Here innocent third-parties pay the bill for inflated economic damages. (This is not to suggest that all who use hedonic damages are unethical, but rather that hedonic damage awards have provided much opportunity for unethical, inflated economic awards and some experts appear to have seized that opportunity.)

In this article, we approached these issues by examining the qualitative/ethical performance of the market for forensic economists. We then identified the market's weak link, namely information competition, and proposed ways to remedy/reduce the information problem via the market mechanism. Emphasis was placed on restructuring the trial process so as to better facilitate the use of defense economic experts, providing better economic information to the parties, and educating the parties so that they can better utilize this information.

It is important to note that only corrective market proposals were examined in this article. As mentioned above, some favor institutional approaches, such as professional certification. The author, along with most economists, views such approaches as risking a case of the "cure" being worse than the "disease." Both economic theory and experience show that such barriers to entry, while done under the guise of protecting consumers, usually benefit suppliers by enhancing their monopoly power. The result in forensic economics would probably be to raise the economic rents of "qualified" forensic economists, but would not likely increase their ethicality. Market restructuring, while no panacea, seems best for improving the ethicality of forensic economics.

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