Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/34795
Authors: 
Ederer, Florian
Fehr, Ernst
Year of Publication: 
2007
Series/Report no.: 
IZA Discussion Papers 3200
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.
Subjects: 
Deception
dishonesty
communication
cheap talk
dynamic tournaments
JEL: 
D83
Document Type: 
Working Paper

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