978-0136118671 Chapter 6 Solution Manual Part 3

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8. Writers’ strike. On November 5, 2007, the Writers Guild of America,

representing 12,000 writers, struck the Alliance of Motion Picture and Television

Producers. A key issue in the strike was the writers’ demand for residuals from

distribution of their work in “new media”—Internet downloads, Internet Protocol

TV (IPTV), streaming video, smart phones, and on-demand cable/satellite

programming. The Writers Guild asked for 2.5% of gross income from new

media. Writers are normally paid a percentage of future revenues, but excluding

those from new media. Is it ethical for a recording studio to keep making money

on their work without compensating them? Hints. It is not enough simply to say

that fair compensation is whatever the market dictates. Any such claim should be

defended by appeal to the conditions of rational choice. The outcome may

depend on some factual issues. To deal with this, analyze the case under the four

scenarios in Table 6.2, where the propositions (a) and (b) are:

(a) There is reason to believe that paying writers the 2.5% would create more

overall utility, because they are currently underpaid and spend much of

their time making ends meet by other means.

(b) There is reason to believe that the movie/television industry as a whole

would not be profitable enough to attract investors if all executives paid

writers the 2.5%.

The conditions for rational choice are designed to analyze particular decisions by

particular people. So to fix the issue, let’s suppose that motion picture executive

It will help to clarify the arguments to suppose the writers are starving artists—

well, not literally starving, but they are just scraping by and have to drive a taxi to

The utilitarian test tells Scone to pay the 2.5% royalty if it would increase overall

utility. Perhaps MBM is doing well enough that the additional payout would

reduce profits but leave the company basically healthy. Perhaps the starving

artists are much further down the concave utility curve than the affluent

At this point students may ask, since when is MBM a welfare agency?

Corporations are supposed to create utility by selling profitable goods and

The argument goes like this. Let’s test the 2.5% payout for generalizability. Let’s

suppose that the rationale is to increase overall utility by paying writers more. If

movie executives always paid higher compensation when it would increase

overall utility, then arguably the movie business would no longer be profitable

enough to attract investors. I don’t know this to be true, but let’s suppose it is. In

If paying 2.% is ungeneralizable, it is not an action (because it has no coherent

This implicitly assumes that Scone has only two alternatives: either pay the

writers 2.5% in new compensation, or pay them only what he is paying now. A

third alternative is to decide that he doesn’t want to be in a business that exploits

writers in this way, and look for another job. This alternative must be subjected to

Note that Scone must change jobs if he has reason to believe that he could create

more utility elsewhere. The tests for rational choice require only that the

reasoning behind the action be consistent. If he has no particular reason to

Finally, the above utilitarian argument is predicated on the assumption that writers

are starving artists who must drive cabs to pay the bills. Perhaps they are better

To conclude, the issue is whether it is ethical and/or obligatory to pay writers

2.5% royalties on residuals on new media. The ethical situation depends on

whether statements (a) and (b) in the exercise are true. The situation is summed

up in the table below.

(b) is false (b) is true

ethical not to pay it.

The particulars of the situation may, of course, impose additional obligations.

The arguments can change dramatically if workers are severely deprived, as in a

sweatshop. Basic needs, freedom, or human dignity may be at stake in such

cases, and it may ungeneralizable to deny these to anyone. It may also be

9. Retrocession. A large private bank employs relationship managers (RMs) who

work with high net worth individuals. The RMs help their clients to manage their

substantial wealth, avoid taxes, and so forth. When the clients invest in certain

funds, the fund owners remit retrocession payments to the bank as a reward.

Consequently, the bank provides its RMs a financial incentive to recommend

funds that provide retrocession. In theory, this need not create a conflict of

interest for the RMs, because it could incentivize them to recommend a fund with

retrocession only when there is a choice among equally attractive investments. It

is widely suspected, however, that some RMs bias their recommendations to favor

investments that yield them a higher commission. Is it ethical for the bank to

provide this kind of incentive?

On the face of it, a utilitarian perspective argues against incentivizing RMs to

promote funds that provide retrocession to the bank. This may boost utility for

the bank, but presumably capital allocation is more efficient when guided by

disinterested advice than when distorted by conflicts of interest, and this is the

As for professional obligation, the payment and acceptance of retrocession seem

to be widely accepted in the industry, as is incentivizing RMs accordingly.

There is an obvious issue of virtue ethics for the RMs. To remain true to their

calling, they must not be influenced by incentives provided by their employer.

Incentives to sell the bank’s own products can create an even more intense

conflict of interest, because the RM’s advancement in the firm may ride on it.

Let’s move on to a generalization test. Incentivizing RMs to promote investments

that are more profitable for the bank is clearly generalizable (if it is not

One might argue, however, that the bank deceives customers by incentivizing

RMs to give less than optimal advice, and this is not generalizable. It is causing

at least some customers to believe falsely that the bank is recommending

The deciding factors (for the bank’s owners/stockholders) are therefore factual

issues, which the bank is obligated to address: (a) the effect of conflicts of interest

10.* Tax avoidance. The private bank mentioned in the previous exercise has a

number of European clients for whom it provides substantial tax savings. By

exploiting loopholes in complex tax laws, the bank allows some of its wealthy

clients to avoid the high tax rates prevalent in their home countries. In some

cases, clients pay only a small fraction of the tax they would otherwise owe. Yet

these clients achieved their success due, in part, to services provided by their

home country. They benefited from an excellent state-funded education and from

a stable and productive economy that is highly subsidized and regulated by the

state. Is it ethical for the bank to provide this kind of advice? Hint. First analyze

the taxpayer’s obligation, and then address the bank’s dilemma. Keep in mind

that a private bank that fails to provide competitive tax advice is at a severe

disadvantage for attracting clients.

First we address the wealthy taxpayer’s situation. For the sake of definiteness,

let’s assume that these taxpayers are paying a much smaller fraction of their

The utilitarian calculation depends on what the taxpayers do with the money they

don’t pay in taxes. If they use it as productively as the government would use it,

In fact, the utilitarian principle may require wealthy taxpayers to avoid paying the

taxes and invest the money wisely—unless this is unethical on other grounds. It

Many people have a sense, however, that wealthy people have a duty to pay their

“fair share” of taxes. The issue is not whether the government has a duty to make

The issue may not arise if the tax avoider invests the money in pro bono causes at

least as beneficial as government programs. Let’s assume, then, for the sake of

Given this assumption, let’s see if the generalization test can establish a duty to

pay taxes above the legal minimum. It is widely assumed that, currently, wealthy

people pay the absolute minimum in taxes. If so, a practice of radical tax

avoidance is already generalized and therefore generalizable. However, do we

The more fundamental issue for this case, however is distributional. Regressive

taxes transfer wealth to the less well off to the wealthy and therefore may violate

the Rawlsian Difference Principle. A wealthy individual who pays a small tax

To conclude, we have not established an obligation for the wealthy taxpayer to

pay taxes above the legal requirement, even when the tax obligation is small

relative to income. However, there is an obligation to invest the saved tax money

We now address the bank’s dilemma. To make the issue interesting, let’s suppose

The last sentence of the exercise settles the utilitarian issue right away. If the

bank doesn’t give competitive tax advice, its customers will get the advice

Giving this kind of tax advice also seems generalizable. Although tax havens may

disappear if all wealthy taxpayers took advantage of them, it is unclear that the

The Difference Principle, however, has more bite. The test is not whether one

Rather, the test is whether the bank’s policy, if generalized, would cause the least

advantaged to be worse off than necessary. As it happens, the bank’s policy is

This puts banks in a difficult ethical position. A long-term solution for the

industry as a whole is to assist the G20 in its efforts to do away with tax havens,