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The competitive advantage of honesty

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  • Pigors, Mark
  • Rockenbach, Bettina

Abstract

We study competitive markets where firms may lie to their workers to reduce costs. Consumers may benefit from firms’ dishonesty through lower market prices. Does firms’ (dis-)honesty affect consumers’ purchasing decisions? Our experiment shows that when honesty is fully transparent, it can provide a competitive advantage: Honest firms sell more and – despite higher costs – achieve higher profits. This finding is in line with our equilibrium predictions when allowing for dishonesty-averse consumers. By identifying circumstances in which consumers – although not the addressee of dishonesty – “punish” firms for their within-firm dishonesty, we contribute both to behavioral ethics and behavioral industrial organization.

Suggested Citation

  • Pigors, Mark & Rockenbach, Bettina, 2016. "The competitive advantage of honesty," European Economic Review, Elsevier, vol. 89(C), pages 407-424.
  • Handle: RePEc:eee:eecrev:v:89:y:2016:i:c:p:407-424
    DOI: 10.1016/j.euroecorev.2016.09.001
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    References listed on IDEAS

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    1. repec:eee:pubeco:v:155:y:2017:i:c:p:138-146 is not listed on IDEAS

    More about this item

    Keywords

    Social responsibility; Lying; Behavioral ethics; Behavioral industrial organization;

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • A13 - General Economics and Teaching - - General Economics - - - Relation of Economics to Social Values
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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