Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Gothenburg, Department of Economics

No 689: Would I lie to you? Strategic deception in the face of uncertain penalties

Buly A Cardak , Ananta Neelim , Joseph Vecci () and Kevin Wu
Additional contact information
Buly A Cardak: Department of Economics and Finance, La Trobe Business School, La Trobe University, Postal: Bundoora, Victoria 3086, Australia
Ananta Neelim: School of Economics, Finance and Marketing, RMIT University, Postal: Melbourne, Victoria 3000, Australia
Joseph Vecci: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: P.O. Box 640, SE 40530 GÖTEBORG, Sweden
Kevin Wu: Department of Economics, Monash University, Australia

Abstract: Using an experiment we investigate the effect of different centralised punishment mechanisms on deception and beliefs about deception in a principal-agent interaction that resembles many everyday expert advisor - client relationships. Agents have private information to transmit to Principals who must decide whether to follow Agent advice. Across our treatments, Agents face a range of expected penalties for deceptive behaviour with varying severity and monitoring probability. The Bayesian Nash equilibrium of the principal-agent interaction predicts penalties to have no effect on Agent behaviour. We find the magnitude of penalties to have important deterrent effects on deceptive Agent behaviour while Agents do not respond to changes in monitoring probabilities. Principal following behaviour increases in response to high penalties. However, it is unaffected by equivalent increases in monitoring. To help us understand the mechanism through which penalties deter deceptive behaviour, we test whether framing activates norms, providing an additional deterrence effect. We find norms are only activated by large penalties, providing a possible explanation for the impact of penalties on deceptive behaviour.

Keywords: Punishment; Deception; Principal Agent; Norm Induced Behaviour

JEL-codes: C91; K42; L51

41 pages, January 2017

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