Experimental Evidence on Signal-Jamming Models of Fraudulent Misreporting
65 Pages Posted: 8 Dec 2012
Date Written: November 12, 2012
The paper develops an experimental reporting game that has a unique signal-jamming equilibrium (SJE) where managers exaggerate the truth and market participants correct the managers’ reports by a constant independent of the state. During experimental sessions, managers exaggerate and market participants correct on average. However, most subjects deviate from SJE behavior: (1) both managers and market participants use mixed strategies that are dominated by pure strategies, and (2) managers exaggerate by more and market participants correct by less when the observed state is low. These behaviors provide a parsimonious explanation for several empirical regularities documented in the literature on fraud.
Keywords: fraud, signal jamming
JEL Classification: G30, C9
Suggested Citation: Suggested Citation