Is Honesty the Best Policy? An Experimental Study on the Honesty of Feedback in Employer-Employee Relationships

Abstract

We theoretically and experimentally examine a situation in which the principal has better information about the agent's ability than the agent himself. The principal can inform the agent about his ability by giving him performance feedback but there might be incentives for her to lie about it. Analyzing a simple signaling model yields the following results. (1) The principal only tells the truth if there are sufficiently high costs of lying. (2) When the principal's marginal return on the agent's effort increases, deception is more likely to occur. We observed ambiguity, however, when testing these theoretical results in a lab experiment. On one hand, the data provide evidence indicating that subjects indeed suffer from costs of lying in this context. On the other hand, we do not find more deception with higher marginal return on the agents' effort for the principal. Instead we observe exactly the opposite pattern: higher marginal returns on the agents' effort lead to more honest principals.

Keywords: experiment, honesty, performance feedback

JEL Classification: M12, M2, M5