Talking about corporate culture has become quite popular in the business world. But why should companies care about corporate culture at all? Why do “soft” concepts like culture matter? Can’t companies simply rely on “hard” economic forces—the value of clear and efficient institutional rules and their associated financial incentives?

Corporate culture is important because human behavior is always co-determined by the set of social norms that prevail in a company and are the core of its culture. It is in the company’s interest to shape these norms through a cooperative culture that mobilizes employees’ voluntary cooperation in the pursuit of the firm’s overall goals. Our research provides behavioral foundations for cooperative culture, based on important scientific insights from experimental and behavioral economics as well as from contract economics.

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Excessive risk-taking in the financial industry is thought to be one of the key contributor to the recent financial crisis (e.g., Diamond and Rajan, 2009; Financial Crisis Inquiry Commission, 2011; Freixas and Dewatripont, 2012). Academics and policy makers have proposed several reasons for undesirably high levels of risk taking, including flawed compensation practices (Krugman 2009), poor corporate governance (Freixas and Dewatripont, 2012), and low capital requirements (Admati and Hellwig, 2013). One explanation that has received increased attention in recent years is the financial sector’s risk culture, i.e., the norms and informal rules of behavior that may favor inappropriately high levels of risk taking. Consequently, policy makers and regulators have called for a change in the risk culture (e.g., House of Commons Treasury Committee, 2008; Power, Ashby, and Palermo, 2013; International Monetary Fund, 2014). However, there is little or no empirical evidence showing that the unwritten rules of behavior in the financial industry encourage financial professionals to take greater financial risks.

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