Deception and Incentives How Dishonesty Undermines E¤ort Provision

In this paper we show that subtle forms of deceit undermine the e¤ectiveness of incentives. We design an experiment in which the principal has an interest in underreporting the true performance di¤erence 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 e¤ort 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 e¤ort relative to fully truthful performance feedback. Moreover, previous experiences of being deceived exacerbate the problem and eventually reduce average e¤ort 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.