Deception and Incentives: How Dishonesty Undermines Effort Provision

University of Zurich Institute for Empirical Research in Economics Working Paper No. 341

IZA Discussion Paper No. 3200

53 Pages Posted: 13 Dec 2007

See all articles by Florian Ederer

Florian Ederer

Boston University - Markets, Public Policy, and Law; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Ernst Fehr

University of Zurich - Department of Economics

Date Written: December 1, 2007

Abstract

In this paper we show that subtle forms of deceit undermine the effectiveness of incentives. We design an experiment in which the principal has an interest in underreporting the true performance difference between the agents in a dynamic tournament. According to the standard approach, rational agents should completely disregard the performance feedback of self-interested principals and choose their effort level as if they had not been given any information. However, despite substantial underreporting many principals seem to exhibit lying aversion which renders their feedback informative. Therefore, the agents respond to the feedback but discount it strongly by reducing their effort relative to fully truthful performance feedback. Moreover, previous experiences of being deceived exacerbate the problem and eventually reduce average effort even below the level that prevails in the absence of any feedback. Thus, both no feedback and truthful feedback are better for incentives than biased feedback.

Keywords: Deception, Dishonesty, Communication, Cheap Talk, Dynamic Tournaments

JEL Classification: D83, C92, M12

Suggested Citation

Ederer, Florian and Fehr, Ernst, Deception and Incentives: How Dishonesty Undermines Effort Provision (December 1, 2007). University of Zurich Institute for Empirical Research in Economics Working Paper No. 341, IZA Discussion Paper No. 3200, Available at SSRN: https://ssrn.com/abstract=1071602 or http://dx.doi.org/10.2139/ssrn.1071602

Florian Ederer (Contact Author)

Boston University - Markets, Public Policy, and Law ( email )

Boston, MA
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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European Corporate Governance Institute (ECGI) ( email )

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Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Ernst Fehr

University of Zurich - Department of Economics ( email )

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Zuerich, 8006
Switzerland
+41 1 634 3709 (Phone)
+41 1 634 4907 (Fax)

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