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Good lies

Author

Listed:
  • Pavesi, Filippo
  • Scotti, Massimo

Abstract

Decision makers often face uncertainty about the ability and the integrity of their advisors. If an expert is sufficiently concerned about establishing a reputation for being skilled and unbiased, she may truthfully report her private information about the decision-relevant state. However, while in a truthtelling equilibrium the decision maker learns only about the ability of the expert, in an equilibrium with some misreporting she also learns about the expert’s bias. Although truthtelling allows for better current decisions, it may lead to worse sorting outcomes. This occurs if misreporting is principally caused by biased experts driven by their conflict of interest rather than by unbiased experts attempting to signal their type. Whenever lying has these features, it increases the decision maker’s expected utility with respect to truthtelling if she is sufficiently concerned about future choices. In these cases, it is optimal to adopt policies aimed at reducing advisors’ career concerns and we suggest real world examples in which these could be implemented.

Suggested Citation

  • Pavesi, Filippo & Scotti, Massimo, 2022. "Good lies," European Economic Review, Elsevier, vol. 141(C).
    • Handle: RePEc:eee:eecrev:v:141:y:2022:i:c:s0014292121002506
    DOI: 10.1016/j.euroecorev.2021.103965
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    • Filippo Pavesi & Massimo Scotti, 2019. "Good Lies," Working Paper Series 39, Economics Discipline Group, UTS Business School, University of Technology, Sydney.

    References listed on IDEAS

    as
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    More about this item

    Keywords

    Experts; Reputation; Cheap talk; Conflicts of interest; Information transmission; Lies;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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