General

Economics of Coverups

The acts documented and alleged in the indictment against Jerry Sandusky are very disturbing to any reasonable person, especially to a parent.  I don't presume to have any professional insights into them.  The behavior of Penn State officials, including Joe Paterno, whether regarding legal or moral obligations, is also disturbing.  On one level, it is incredibly puzzling how seemingly responsible people could cover up and enable these actions for more than a decade.  On the other hand, I have observed cover-ups (of lesser problems and lesser public attention) in many other circumstances involving individuals in positions of responsibility.  Two general factors repeatedly stand out as influences:

1. Close Personal Connections:  longstanding personal or familial ties generate loyalty, sometimes far too much from an external observer's viewpoint.  You don't "snitch" on some one within a close fraternal circle.  Such "no snitch" codes have existed in mafia circles but also within police circles and other tightly knit groups.   In many cases, the fraternal link trumps concern for victims in spite of the severity of acts (murder, abuse, ...) .  To anyone outside the circle, who doesn't share the personal link and loyalty, the lack of concern for the victims and protection of the perpetrator is unconscionable. Consider this case.   If an assault occurred in the Penn State locker room but the perpetrator anonymous to these Penn State officials, would there have been even a moment's hesitation in bringing in law enforcement officials?

2. Embarrassment/Fear:  what are the consequences of exposing this person?  Will it have negative reflections or ramifications on me?  Will it negatively reflect on the organization?  These concerns can lead to an adverse selection as to what gets exposed -- the worse the offense (at least to a point), the less likely to be exposed.  When I came to WKU 25+ years ago, my colleagues would joke, "if you are going to mess up, do so in a big way.  Small violations may get you censured or fired, but big transgressions will be kept quiet and "punished" with a sabbatical." Obviously, it doesn't always work this way, but I have observed this upside down outcome several times.  This is also where Skip's analysis ties in with mine.  The bigger the reputation or status of the people involved, the larger the negative reflection on the organization and the stronger the influence to hush things up.

Ironically, watching a "48 Hours" repeat on Tuesday as I rode my stationary bike and thought about the Penn State case, these same kinds of influences worked out in the investigation of homicides in a housing project -- personal loyalties, fear, reputations, all contributed to an unwillingness of a neighborhood's residents to expose a murderer, even one who killed two parents in front of their small children.  Yet, I think society(rightly)  tends to be more forgiving of lack of action by those fearing for their lives than those fearing for their own or their organization's reputation in covering up criminal acts.

Also, society seems to readily accept the reluctance of family or close personal friends to report misdeeds, much less become the primary accuser.  However, here, again, a threshold exists.  Few would expect a person to report a friend or family member for small violations of ethical standards -- say, making private copies on the company copier.  When the unethical activity ratchets to a higher level -- say, misappropriating a sizable amount of funds -- the protection of the activity becomes more questionable.  When the behavior involves heinous acts like murder or sexual abuse, a threshold is crossed where those outside the circle of friends don't pass off the responsibility of friends and family.

4 Comments

  • Avatar Of Michael C
    michael c November 10, 2011

    When I clicked this article title, I had expected a much more cynical analysis of the PSU coverup. Consider what follows a bit of imagination about coverups and economics:
    Imagine you are faced with the choice in 2002 of A) what happened (the coverup), B) forceful investigation resulting in the belated arrest we saw last week. What are the economic implications?
    Paterno himself is a top coach, but is only paid $500K/year to coach at PSU. In scenario A, the 9 years since are worth $4.5 Million to him in salary alone, plus the economic value of his additional achievements – particularly the career record for wins. Certainly this alone could sway him as much as the influences 1 and 2 mentioned above. But Paterno isnt the only one profiting from PSU football. This article suggests that hundreds of millions per year in revenue accrues to PSU due to football, so over the 9 years it is easily over $1 Billion in revenue for the school. (http://www.huffingtonpost.com/2011/11/10/penn-state-scandal-financial-fallout-from-sex-scandal-could-be-huge_n_1087050.html). As much as I cherish my Close Personal Connections (which higher admin did not have with Sandusky) and am Afraid of Embarrassment (which certainly is happening in A and B), this is enough money to make these emotional and interpersonal relationship concerns of less importance. The cold-hard economic calculus of the coverup is difficult to ignore.
    Scenario B is tougher to estimate the impact. Given the fallout at other schools from much less grievous scandals, the arrest of an assistant coach for only his transgressions thru 2002 would still have likely buried the program. If Paterno acted admirably at the time, his job may have been saved, but his reputation would have been severely impacted due to his close connections with Sadunsky. With PSU football recruiting and Paterno tarnished, the two BCS bowl games of ’06 and ’09 (at $15M and $18M) would almost certainly be gone. For Paterno, this outcome might not have been terrible, but for the university it would have been a huge loss even if revenue only fell by 50%. There is a small, possibly tiny, chance that coming clean in 2002 to the strongest degree would absolve PSU of the worst of the crisis. Certainly it would cost money for the team in the short run, but many schools have shown it possible to recover from big setbacks (NCAA sanctions). It is even possible that admin would keep their jobs if they acted forcefully to get ahead of the issue.
    If one has such foresight, it makes a classic Nash equilibrium: Choose A or B, which either succeed or fail.
    [A, Succeed] – This is what happened. School takes in $1B, 9 good years, and much later shame.
    [A,Fail] – The coverup fails immediately, costing revenue and the jobs of all involved. No money, but less shame because the coverup did not span 9 years.
    [B, Succeed] – Immediate but muted shame, jobs kept, less revenue
    [B, Fail] – Immediate shame, still mostly fired, less revenue.

    [A,F], [B,S], [B,F] all cost PSU lots of money. If we discount shame like money, the immediate shame of [B,F] may be worse than (or equal to) the deferred shame of [A,S]. Depending on your tradeoff of money for shame, [A,F] is only slightly worse than [B,F]. If you care nothing for shame or view the likelihood of successfully outing and jailing your storied head coach’s friend and key associate while maintaining a successful football operation as zero, then A maximizes your economic (but decidedly not moral) benefit in all cases.

  • Avatar Of Dan
    Dan November 10, 2011

    The optimal economics to PSU would have been to take the 1998 investigation seriously. If the school had cut their ties to Sandusky in 1998 the damage to their reputation would have been minimal and offset by demonstrating how seriously they regard what he did.

    By 2002 only the most head in the sand sycophant would believe Paterno knew nothing about the 1998 investigation and would excuse him for not taking McQreary’s story seriously. So in 2002 the costs to PSU if Sandusky is exposed has gone way up. More victims and foreknowledge of his actions. Then waiting until 2011 has jacked the costs up with more and more victims.

    PSU had a decision tree starting in 1998 where they could keep silent and not lose any money or do the right thing and take a financial hit offset by strengthening their moral reputation. In 1998, 2002 and until the GJ report was made public they made the decision to keep quiet. Now, instead of a minor tremor in 1998 they have a full blown Japan earthquake and tsunami.

    Universities are supposed to be great fonts of wisdom but this case makes PSU look dumber than an underfunded inner city kindergarten. Did the adults, starting with Paterno, really think Sandusky’s actions would remain secret forever? After the 1998 investigation? With McQueary, McQueary’s father, Paterno, Shultz, Curley and who knows how many other ‘adults’ at PSU aware of what McQueary and the janitors witnessed? Were these people isolated in Siberia during the Catholic priest scandals? Can any parent think these geniuses are capable of teaching their kids?

    I don’t think the money the PSU football program earned since 1998 or 2002 will be the important factor in computing damages. Being a state university, any attorney graduating in the top 95% of their class knows there is a bottomless pool of money available. The ability of the plaintiffs attorneys to negotiate or convince a jury will determine how much the school (and taxpayers) will pay.

    But whatever hits to PSU bank balance and reputation ensues, it would have been exponentially less had the decision tree ended in 1998.

  • Avatar Of Dan
    Dan November 11, 2011

    Penn State is not the only institution affected by what Sandusky did. The Second Mile organization started by Sandusky has a lot of big names associated with it, mostly as honorary board members, and the charity apparently had some previous knowledge of what Sandusky was doing. I know Cal Ripken and Lou Holtz have resigned as honorary board members and there are other big names on the board.

    In St. Louis I heard an interview with Dick Vermeil who wrote the forward for Sandusky’s book and was just devastated about what has come out. Now people will always associate his name with that book. And to top it off, Sandusky titled his book Touched.

    According to the New York Daily News:

    Second Mile said that the organization was informed only once about Sandusky’s alleged abuse. The statement refers to Second Mile CEO Dr. Jack Raykovitz’s testimony to the grand jury that he was notified by Curley of an alleged 2002 sexual assault by Sandusky on a young boy in a shower on the university’s campus. Raykovitz testified that Curley told him “there was no finding of wrongdoing” after an internal review.

    “At no time was The Second Mile made aware of the very serious allegations contained in the Grand Jury report,” reads The Second Mile’s statement. The organization said it has cooperated with authorities during the ongoing investigation.

    Six years later, in 2008, Sandusky informed The Second Mile that he was being investigated for allegations made by a Clinton County (Pa.) youth, and the charity “made the decision to separate (Sandusky) from all of our program activities involving children. Thus, from 2008 to present, Mr. Sandusky has had no involvement with Second Mile programs involving children.”

    So according to Second Mile, they were told about the 2002 incident but didn’t separate from Sandusky until 2008. They just took the school’s word that the 2002 incident was no big deal. Just like Paterno never followed up, Second Mile seemed like they didn’t want to know any more about what Sandusky was up to.

    Second Mile doesn’t have unlimited resources like PSU and I’m not sure how vulnerable the personal assets of board members would be to civil suits. But you can bet everyone associated with Second Mile is looking to protect themselves and wish they’d never heard the name Jerry Sandusky.

  • Avatar Of Rob Macdonald
    Rob Macdonald November 15, 2011

    Interesting thoughts Brain, thanks for this (and to Skip too). Is there any formal modelling of such forces (I imagine there would be models of corruption, of which this is a form) that might be interesting to compare to the similar yet different models of issues such as doping, or match-fixing in sports?

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