Better to Win Honestly Than to Get Rich by Lying

Sometimes there are opportunities to make easy money through lying, and not everyone can resist that temptation. However, lying involves psychological costs. Therefore, some individuals may be even willing to pay in order to avoid the lying opportunity and to face the chance for honest money. The paper presented in this ZEW Research Seminar investigates, theoretically and experimentally, such self-selection of individuals based on their lying costs. It is developed a two-stage model in which individuals can first purchase a higher likelihood of achieving an honest success in a binary lottery. Then, they take part in the lottery and report the outcome with a possibility to lie about it. The model predicts a close relationship between an individual's lying costs, the willingness to pay (WTP) in the first stage, and the individual's subsequent reporting behavior in the second stage. The experimental design follows the model's set-up. Both in a between- and a within-subjects comparison, the paper finds that the presence of the opportunity to lie significantly reduces individuals' WTP for improving the chance of an honest success as compared to a control task without manipulation opportunity. Reporting behavior follows the theory prediction: dishonest individuals have a significantly smaller WTP in the presence of the opportunity to lie, while there is no difference for honest individuals. Conversely, the WTP in the first stage predicts subsequent lying behavior. Hence, the paper deals with evidence that individuals self-select into lotteries with different chances for an honest success based on their individual lying costs. Moreover, the set-up allows for a precise estimation of the distribution of lying costs.