Indonesia Research Update #17: Institution, Lies, and Islam by Lury Sofyan



Although humankind creates institutions as a foundation for human interactions, there are some circumstances where an institution does not perform well in providing adequate control to inhibit or punish unethical behaviour, nor to stimulate or grant the positive. We have seen that institution, in particular in developing countries, is ineffective in curbing corruptions, bribery and other rule violation acts.

When an institution is weak, it produces an “unbinding” law since the value of the law is not internalized into the belief that touches the heart of the individual in the society and applied in day to day behaviour. The weak institution promotes a corrupted political system that does more harms than goods and most of the time allows only elite groups to gain privileged access to valuable information and resources. Mostly this practice compromises market institutions which in turn benefits only the haves, left behind the destitute, and worsen inequality. The haves, later on, support their political networks as payback through money politics and media control to channel propaganda which in turn undermining democracy.

A weak institution also damages state capacity. Government spending does not reach its objective since procurement system is corrupted. Tax morale is degraded. People unwilling to pay tax and the tax authority itself is politically weakened to benefit the haves. Quality of public services becomes poor since the government is running out of the budget. Hard Infrastructure such as roads, terminals, ports, public transportation are remained underdeveloped contributing to high transportation cost, higher price of goods & services, and inflation; making the whole economy inefficient. Soft infrastructure such as educations, health and social security system is also inadequate thus discourage human capital development. These all are hindering country capacity to develop and gain prosperity.

One thing that avoids individual to break the law when institution under-performed, among others, is intrinsic honesty. Since honesty construct trust and trust is a key aspect of sustainable performance of firms, industry and even nations (Cohn, Fehr, & Maréchal, 2014). Most importantly, study shows that country which has high honesty or low-rank PRV (prevalence of rule violation) index is found to be rule obeyed (Gächter & Schulz, 2016). Hence, understanding honesty and lie is important to shape a better institution.

General lie theory suggested 3 different perspectives of lie. First, the lie theory that assumes people are dishonest. This theory is in line with the standard economic theory which perceives people as homo-economicus thus lie when they get benefit out of it (Fischbacher & Heusi, 2008). This theory is also in line with the standard cost-benefit model which perceived people as purely individual who think about them self, calculating for their own benefit, and only care about external rewards (Mazar, Amir, & Ariely, 2008). Second, lie theory that assumes people are honest. People are honest because they avoid guilty feeling if others expectation is violated (Dufwenberg & Gneezy, 2000). Third, there is an increasing support of lie theory that situated in between. This theory argued that there is no sharp difference between full honesty and dishonest, rather than a continuum that spread between this contradicts two ends – suggesting elastic justification (Hsee, 1995, 1996). Mazar et al. (2008) also claimed so-called Self-Concept Maintenance that people are not fully cheating even they have the opportunity to do so. They argued that when people had the ability to cheat, they cheat, but, the magnitude of dishonesty per person is low relative to the possible maximum amount.

When a child born, however, he or she is not inherited with a tendency to lie or honest. It is the surrounding environment that influences people’s belief since people internalize the norms and values of their society (Henrich & Gil-White, 2001). Lie and any other rule violation attitude is contagious; if people live and grow in the area when lie is prevalent, it will affect individual to tend to act lie too. Bad environment crowding out honesty (Frey, 1992; Romaniuc, 2016) and weak institutions and cultural legacies impair individual intrinsic honesty (Gacther & Schultz, 2016). People also react to the unethical behaviour of others, and their reaction depends on the social norms (Gino, Ayal, & Ariely, 2009). When elders do lie, the juvenile will copy and then passes this to future generations as an accepted culture. This fact suggesting a vicious circle effect that keeps institution difficult to move to better equilibrium.

In this very moment, the only question left is the role of religion. How is the role of religion in preventing rule violation act? Does religion prevent people from breaking the rule such as corruptions and bribery? Does religion promote positive social norm such as: keep promises, don’t cheat, do queue, and don’t tell lies? Unfortunately, PRV index shows that religious countries in particular Moslem majority country such as Indonesia, Malaysia, Kenya, Guatemala, Tanzania, Maroco, and so forth have higher rule violation act (higher PRV rank) than less religious country.

More research must be done to understand this. However, learning from the history of Islam, it suggested contrasting phenomena. Historically, Islam gave an external shock to bad institutions at that time and bring the era of darkness to brightness. Islam promoted the value of humankind as the basis of economic, politic and social institution. For example, before the ritual of 5 times prayer and fasting took place, honesty became one of the first fundamental things that Prophet Muhammad S.A.W delivered to Arabian society. His positive attitude became an effective preach of Islam religion and brought him to become a model of a truthful, honest, trustworthy person; the “Al-Amin”. Honesty and trust is lubricant of any transactions and contracts.   Prophet Muhammad S.A.W had shown us an example that honesty had brought him to become a successful trader and respected political leader.

While incorporating Sariah study in above the line system such as financial syariah, political syariah, etc. is important, emphasizing the act of honesty and other positive values are crucial since honesty is the fundamental driven of positive behaviour that works below the line in whatever system human live. A study in asset market experiment (Smith, Suchanek, & Williams, 1988 – and its variances) gives a perfect example that dealing only with market institutions – such as excluding interest in the market – in fact, do not omit the incident of price bubbles. Individuals still racing up to trade in the market even the market price is higher than fundamental value showing the animal spirit forcing individual to gain profit as much as possible.

In Quran, the word “honest” appears 64 times, while “lie” 4 times. This two words represent good and bad and have become the root of all human decision making. Supposedly, it shapes individual belief to do something good, it prevents individual to cheat, avoid corruption and bribery. How this honesty in Islam is internalized and rooted in every Moslem behaviour is an important issue that must be tackled and, in my opinion, it must be the centre of Indonesia cultural transformation. Honesty shall underpin every decision in the economy, politics, and social life. In that way, honesty will promote cooperation, stimulate trade, boost economic growth and shape better institution for better prosperity.

If we can generalize rule compliance model by Allingham & Sandmo (1972) – and its variances – besides role model and law enforcement, education perhaps is the key to stimulate honesty. However, it is a challenge to design an educational based system that could effectively influence day to day behaviour and does not stop at school curricula, good grades, and formality perspectives only.



Allingham, M. G., & Sandmo, A. (1972). Income tax evasion: A theoretical analysis. Journal of Public Economics, 1 (3-4), 323-338.

Cohn, A., Fehr, E., & Maréchal, M. A. (2014). Business culture and dishonesty in the banking industry. Nature, 516.

Dufwenberg, M., & Gneezy, U. (2000). Measuring Beliefs in an Experimental Lost Wallet Game. Games and Economic Behavior, 30, 163–182.

Fischbacher, U., & Heusi, F. (2008). Learning and Peer Effects Lies in Disguise An experimental study on cheating. Research Paper Series Thurgau Institute of Economics and Department of Economics at, 40.

Frey, B. S. (1992). Tertium Datur: Pricing, Regulating, and Intrinic Motivation. Kyklos, 45 (2), 161–184.

Gächter, S., & Schulz, J. F. (2016). Intrinsic honesty and the prevalence of rule violations across societies. Nature, 531(7595), 1–11.

Gino, F., Ayal, S., & Ariely, D. (2009). Contagion and Differentiation in Unethical Behavior. Psychological Science, 20(3), 393–398.

Hsee, C. K. (1995). Elastic justification: How tempting but task irrelevant factors influence decisions. Organizational Behavior and Human Decision Processes, 62, 330–337.

Hsee, C. K. (1996). Elastic justification: How unjustifiable factors influence judgments. Organizational Behavior and Human Decision Processes, 66, 122–129.

Henrich, J., & Gil-White, F. J. (2001). The evolution of prestige: Freely conferred deference as a mechanism for enhancing the benefits of cultural transmission. Evolution and Human Behavior.

Mazar, N., Amir, O., & Ariely, D. (2008). Dishonesty of Honest People: a theory of self-concept maintenance. J. Mark. Res, 45, 633–644.

Romaniuc, R. (2016). Intrinsic motivation in economics: A history. Journal of Behavioral and Experimental Economics, 10(0), 1–9.

Smith, V. L., Suchanek, G. L., & Williams, A. W. (1988). Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets. Econometrica, 56(5): 1119–1151.



Lury Sofyan is currently doing a Doctoral Program in Behavioral Economics at University of Nottingham.

He is a staff at Ministry of Finance Republic Indonesia.

His research interests are related to institution & behavior, inequality, and taxation.

Contact him at


Indonesia Research Update is an initiative by GoLive Indonesia that aims to promote and disseminate knowledge and information obtained through research completed by Indonesian students outside of Indonesia.

We sincerely thank Lury and wish the best for his future endeavours in career and life.


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