Social Norms and Cheating: An Application to Credence Goods Markets (Job Market Paper)
In credence goods markets, consumers possess less information about whether the products or services fit their needs than the experts. This information asymmetry can lead to fraudulent practices, such as mistreatment and overcharging. This paper explores how behavioral factors shape market outcomes in credence goods markets by focusing on two psychological preferences of the expert: an intrinsic cost to cheating (Cheating Aversion) and a social-image concern (Perceived Cheating Aversion). I develop a formal social-norm-based framework to define cheating and analyze credence goods games within two institutional settings: (i) Verifiability, and (ii) Liability. The findings indicate that when prices are fixed, integrating both concerns about cheating can reduce unethical behavior and improve efficiency in both institutional contexts. However, when the expert has power to set prices, consumer achieves the highest expected utility at moderate levels of sensitivities; overly high sensitivities can be detrimental under Verifiability. In contrast, under Liability, high sensitivities benefit only the expert and have no impact on consumer utility.
Cheating With Externalities and A Regular Audience (With Martin Dufwenberg), under review
Several recent behavioral theories shed light on why a large experimental literature documents reluctance of subjects to cheat in environments where die rolls are reported. It is implicitly assumed that material externalities associated with cheating do not influence behavior. We argue that such an assumption is questionable, point out that existing experimental designs are inadequately equipped to explore empirical relevance, and develop a novel design that can address these issues. We also examine whether, once such an audience is present, the experimenter can observe the data-generating process more fully than in previous designs without altering behavior. This has important implications for testing competing theories of social image concerns. We formulate relevant hypotheses and report corresponding results.
Guilt Aversion and Social-Image Concern in Cheating Games with Negative Externality
This paper develops a model of dishonesty in self-report settings where misreporting imposes harm on others. I focus on two belief-dependent motives: (i) a social-image cost of being suspected dishonest (perceived cheating aversion), and (ii) guilt from disappointing others relative to their expectations (guilt aversion). The model accounts for the common “partial-lying” pattern when image concerns dominate, and predicts downward misreports in pooling equilibria under sufficiently large externalities. A further insight is that strong guilt aversion may paradoxically foster more dishonesty: by strategically lowering others’ expectations, individuals may cheat more to mitigate anticipated guilt.
Deposit, Hold-up, and Vengeance
In scenarios where contracts are incomplete, one party may exploit the other who has already made a relationship-specific investment, thus leading to inefficiency. I establish a hold-up model with bargaining in which the investor (held-up party) holds the “residual rights of control” of the investment. The inefficiency is severe when the investment cost is quite large. Introducing a non-refundable “deposit” can help curb opportunistic behaviors, and reciprocal motivations further mitigate the holdup problem. If the investor is sensitive enough to negative reciprocity but the holding-up party is not, all equilibrium payoffs are efficient, and the holdup behavior disappears from the equilibria.