How Rewards Enhance Truthful Reporting: An Experimental Analysis

Abstract

We assess experimentally the problem of untruthful reporting when an entity self-reports information to a regulatory authority. To enhance truthful reporting, an independent third party is involved to review the report for truthfulness. In addition, a representative of the regulatory authority may check the verified report. Most of the time, the reporting entity selects and pays the third party, which is exposed to competition with other third parties. This may lead to conflicts of interests and promote untruthful reporting. In the present study, we show that providing rewards for successful detection, and thus turning the third party or the regulatory authority into “bounty-hunters” can significantly enhance truthful reporting. In our setting, rewarding the third-party tends to be more cost-effective than rewarding the regulatory authority as the latter induces a higher rate of unnecessary inspections on truthful reporting.

Keywords: truthful reporting, self-reporting, rewards, experiment

JEL Classification: C92, D83, Q58