Individual Behavior and Collective Action: The Path to Iceland’s Financial Collapse

Thorvaldur Gylfason*, Gylfi Zoega

*Corresponding author for this work

Research output: Chapter in Book/Report/Conference proceedingConference contributionpeer-review


Unsustainable accumulation of debt precedes financial crises. The recent Western financial crisis was no exception in this regard. The external debt of Greece, Iceland, Ireland, and Spain increased exponentially, in Iceland at a rate higher than the rate of interest on foreign debt. The Ponzi scheme that played out in Iceland begs the question why a country would set out on a path that could lead to a financial crisis. We address this question and describe the private incentives faced by bankers, financiers, politicians and others. In particular, we show how private incentives and a culture that valued financial gains above all else collided with socially desirable outcomes. The root of the problem in Iceland as well as in other crisis countries was a failure at the state level to align private incentives with what was socially prudent, a failure due, at least in Iceland, to a combination of mistakes, incompetence and what can only be called corruption. Furthermore, misplaced belief in a market economy where morals and ethics play no role paved the way to serious lapses in accounting and in the operation of the banks.

Original languageEnglish
Title of host publicationCapitalism, Global Change and Sustainable Development
EditorsLuigi Paganetto
PublisherSpringer Science and Business Media B.V.
Number of pages24
ISBN (Print)9783030461423
Publication statusPublished - 2020
Event31st Villa Mondragone International Economic Seminar, 2019 - Rome, Italy
Duration: 25 Jun 201927 Jun 2019

Publication series

NameSpringer Proceedings in Business and Economics
ISSN (Print)2198-7246
ISSN (Electronic)2198-7254


Conference31st Villa Mondragone International Economic Seminar, 2019

Bibliographical note

Publisher Copyright:
© 2020, Springer Nature Switzerland AG.

Other keywords

  • Corruption
  • Culture
  • Financial crises
  • Iceland
  • Quality of governance
  • Rent seeking


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