Uncertainty Paradox: Why You Should (Not) Lie

Abstract

During the COVID-19 pandemic, unreliable statistics are a growing concern. The government may want to underreport, and cure sellers may want to overreport the number of cases. We introduce an Uncertainty Paradox: seemingly profitable misreporting can be unprofitable when misreporting leads to uncertainty. We relax both the correct belief and common belief assumptions, and show that the seller should prefer no uncertainty in auctions. However, the government---which runs the pandemic procurement that allocates stimulus packages among companies affected by the pandemic---may prefer uncertainty. The incentive to misreport increases with the pandemic impact, and in the limit, uncertainty “disappears.”

Keywords: auction, procurement, uncertainty, pandemic, risk aversion, incorrect be-lief, shill bidding

JEL Classification: D44, D81, H57