Preferences for Truth-telling

A potential buyer of a car stating his willingness to pay, a self-employed shopkeeper reporting her income to the tax authorities, an employee telling his boss that he worked the entire weekend: many situations involve one person having private information and telling another person or institution about it. In these situations, economists usually assume that people say whatever lies in their immediate interest - which is mostly not the truth. In contrast, morality and religion teach us to be honest. Surprisingly little is known about how people actually behave in this dilemma of economic incentives and moral values. Recent studies in economics and psychology suggest that many people report their private information truthfully or at least do not lie as much as they could to obtain a monetary gain. However, we don't know the exact patterns of reporting, the underlying reasons for this behaviour, and whether and how one could influence it.

Since reporting private information is at the heart of many economic activities, it is crucial to understand this behaviour in order to predict economic outcomes. Moreover, many institutions are designed to induce people to reveal their private information truthfully, based on the assumptions that no person has qualms about lying. That some people are honest or only deviate slightly from the truth can thus have important effects on the design of institutions. Policies might be feasible that are less complex than the policies that are optimal when all agents lie as soon as this is profitable. It might be possible to change reporting behaviour in simple and low-cost ways, thus 'nudging' people to be more honest.

Oftentimes, e.g., in criminology, researchers and practitioners are interested in identifying whether a specific individual lies, but this is not always easy to do. In this project, I will address the question how people report their private information from a different angle: I will try to identify reporting patterns in a group of people. This is sufficient to answer many important questions, e.g., regarding which circumstances reduce lying, the impact of socio-economic variables, or the relationship of honesty with other moral values that people might hold. The aim of the project is to develop an empirically validated theory which explains the current experimental data on reporting behaviour and delivers novel predictions on how institutions can encourage truth-telling. I will also study which observable characteristics correlate with honest reporting. In this project, I will thus combine economic theory with laboratory experiments and representative experiments, i.e., experiments using a representative sample of the population, outside the laboratory.

The basic idea underlying the experiments is extremely simple: subjects roll a dice without anyone observing them, they then report their roll, and get paid, in pounds, whatever they report. Of course, anybody can get lucky and roll a 6; but not everybody. By comparing the actual distribution to the truthful distribution one can learn about the behaviour of subjects while still keeping their information, i.e., their dice roll, truly private. I will build on this basic experimental design to address several related questions, for example: Why do people lie? Will people lie more readily for 'big questions' than for 'small questions'? What is the relationship between honesty and trust? Do women lie more than men or vice versa? What is the influence of religious beliefs? How can one explain that some people deviate from the truth but do not lie as much as they could? How does an intrinsic preference for honesty interact with concerns for reputation?

By combining theory and tightly controlled empirical evidence, this project will strive to advance our understanding of how people report their private information and add to the interdisciplinary debate on honesty and lying in the social sciences.

Although the main focus of this project is to further our understanding of preferences and thus to advance economic theory, the results of the project will also be interesting for many parties outside academia.

Tax authorities and social security bodies are interested in how to identify people who misreport their income or eligibility and at the same time would like to reduce such misreporting. This research could inform both endeavours. Moreover, the representative experiment could indicate which groups of the population are most likely to evade taxes. The model might even point to effective alternatives to auditing, in the spirit of 'nudging'. The cabinet office has set up a 'Behavioural Insights Team' to use psychology and behavioural economics to inform interventions. In this spirit, HMRC is currently testing different ways to formulate letters to chase late tax payers and first results indicate that an extra £160m could be collected with appropriately formulated letters. There might exist similarly easy ways to reduce tax evasion. Results of this study, especially project 5, could also inform policies that try to induce truth-telling by naming and shaming.

Private firms could also be interested in my research. The current financial crisis was triggered by a housing boom in the USA, which in turn was fuelled by mortgages given to households whose income was too low to qualify for normal mortgages. Many of these sub-prime mortgages were issued as "low-documentation" mortgages, involving only unconfirmed claims about own income. Banks and mortgage-lenders have a strong interest in better understanding which kinds of person are more likely to overstate their income in such mortgage applications and how to design the applications to reduce such over-reporting. Similar problems arise for other types of debt, e.g., via credit cards. Furthermore, insurance companies have to decide which claims might be fraudulent; understanding how people report private information is essential to do this. They also have to identify which groups of their clients are most likely to commit insurance fraud to adapt contracts (see project 3).

Within firm, efficient information transmission is crucial for the success of any business. Understanding why people misreport is a prerequisite to design environments that increase the reliability of this information transmission. The screening of job seekers is another potential application. More generally, every hidden-information principal-agent problem involves the reporting of private information; labour contracts can shape these settings to some extent. How such contracts should be designed when agents have a preference for truth-telling is so far not understood.

I describe in the "Pathways to Impact" how I intend to reach the beneficiaries and users of this research in the public sector and private sector.