Evasive Lying in Strategic Communication

Kiryl Khalmetski, Bettina Rockenbach and Peter Werner
University of Cologne, Working Paper Series in Economics No. 92, 2017

Information asymmetries in economic transactions are omnipresent and a regular source of fraudulent behavior. In a theoretical and an experimental analysis of a sender-receiver game we investigate whether sanctions for lying induce more truthtelling. The novel aspect in our model is that senders may not only choose between truth-telling and (explicit) lying, but may also engage in evasive lying by credibly pretending not to know. While we find that sanctions promote truth-telling when senders cannot engage in evasive lying, this is no longer true when evasive lying is possible. Then, explicit lying is largely substituted by evasive lying, which completely eliminates the otherwise positive effect of sanctions on the rate of truthtelling. As outlined in our model, the necessary prerequisite for such an ‘erosion’ effect is that evasive lying is perceived as sufficiently less psychologically costly than direct lying. Our results clearly demonstrate the limitations of sanctioning lying to counteract the exploitation of informational asymmetries and may explain the empirical evidence from the finance industry that sanctions for financial misconduct eventually appear to be not very efficient.

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Incorporation Decisions and Job Creation in New Firms

Susanne Prantl and Frederik Thenée
University of Cologne, Working Paper Series in Economics No. 91, 2017

The regulation of firms can influence job creation in new firms, and these influences may contribute to long-term effects on the economy-wide distribution of jobs across firms. In this paper, we study the influences on job creation in new firms that follow from incorporation law, specifically the law-induced cost at firm entry. To identify these influences empirically, we allow for endogenous decisions on incorporation and, in addition, exploit a natural experiment in regulation that accompanied German reunification. Our empirical findings are in line with predictions that we derive from the model of Lucas (1978) by integrating incorporation decisions. We show that an increase in incorporation-related entry cost reduces the emergence of incorporated firms in a population of new firms. In addition, such an increase leads to higher initial job creation in incorporated than in unincorporated firms and decreases the mass of the entry size distribution across incorporations relative to the distribution across unincorporated firms in the intermediate range.

Incorporation Decisions and Job Creation in New Firms

Sharing Guilt

Roman Inderst, Kiryl Khalmetski and Axel Ockenfels
University of Cologne, Working Paper Series in Economics No. 90, 2017

Keywords:Shared guilt, trust, guilt aversion, responsibility diffusion, financial advice

We provide laboratory evidence that the attribution of guilt for disappointed trust is shared between the players whose choices eventually contributed to this disappointment (including the disappointed player herself). We refer to this as "shared guilt" and present a model that captures the phenomenon, and which is consistent with various previous findings. We also discuss potential policy implications.

Sharing Guilt