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)[Draft coming soon]
Reports, for example, tax returns, research findings, or peer evaluations, can in some instances be falsified. We develop an experiment to study how externalities affect an individual’s self-reporting behaviors. We modify the cheating game by Fischbacher & Föllmi-Heusi (2013) by matching a reporter with a peer subject and manipulate the externality, either positive or negative. Specifically, the reporter privately rolls a die and then issues a report to the matched audience, which determines the earnings of both the reporter and the audience. Another design arm compares treatments with and without the experimenter observing the die-rolls. In the existing literature on the cheating game, the experimenter is typically assumed to serve as a relevant audience, which contrasts with the perceived role of the experimenter in most other laboratory experiments. We aim to explore whether the observability of die-rolls by the experimenter affects the decision-maker’s behavior when a regular audience is present. In addition, the observed treatments enable us to compare theories between Dufwenberg & Dufwenberg (2018) and Gneezy, Kajackaite, & Sobel (2018).
Guilt Aversion and Social-Image Concern in Cheating Games with Negative Externality
I theoretically study cheating in Fischbacher and Follmi-Heusi (2013) type cheating games with negative externality. I assume that three motives play a role when deciding whether and how much to lie: (i) the monetary benefit of the lie; (ii) the disutility of letting others down, i.e., guilt aversion; and (iii) the disutility of being perceived to cheat, i.e., perceived cheating aversion --- one specific social-image concern. The model predicts the existence of a partial lying pattern for people who are sensitive enough to perceived cheating. Individuals who are guilt-averse cheat less than ones who are not when cheating generates a negative externality. Downward lies may occur when the magnitude of the negative externality is high.
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.