Lying and Friendship

Transcription

1 Lying and Friendship Sugato Chakravarty, Yongjin Ma, Sandra Maximiano This version: May 2015 Abstract We investigate the interaction between friendship and deceptive behavior. We implement a sender- receiver game, in which senders choose from a distinct set of allocations that embodies a multi-dimensional set of potential lies. Our design directly distinguishes between lying aversion and outcome oriented social preferences without the need for explicitly eliciting social preferences. We consider a strangers treatment and a friends treatment. Results show that subjects are less likely to lie to friends than to strangers; that they have different degrees of lying aversion, and that they lie according to their social preferences. Pro-social individuals appear more lying averse. If they do lie, they are equally likely to do so with friends as with strangers. Keywords: sender-receiver game, lying aversion, social ties, social preferences JEL: C92, D03 Chakravarty and Ma: Department of Consumer Sciences, Purdue University, West Lafayette, IN 47907, US. Maximiano: Department of Economics, Krannert School of Management, Purdue University, West Lafayette, IN 47907, US. Corresponding author: Sandra Maximiano, Purdue University, Krannert School of Management, room West State Street. IN Phone: maximiano@purdue.edu We thank Timothy Cason, Abu Zafar Shahriar, and the seminar participants in the experimental Brown Bag seminar at Purdue, and the seminar participants at ESA meetings in Copenhagen, 2010, at the University of Amsterdam, at the University of Rotterdam, at DePaul University, and at Nova University of Lisbon for their helpful comments and suggestions.

2 1 Introduction According to standard economic paradigm we are all potential liars as long as lying makes us better off. As students we may lie about our abilities to impress professors; as workers we may fabricate excuses for oversleeping and job tardiness; as politicians we may make unrealistic promises to increase our chances of being elected; as lawyers, we may fabricate far-fetched theories to win the case. Recent experimental evidence, however, appears to provide a stark contrast with the pervasiveness of lying in everyday life. Even if lying is encouraged and rewarded, people often set their own boundaries between unethical and self, or socially, approved deception, weigh the costs and benefits of lying and, sometimes, choose to tell the truth even when it is economically disadvantageous to do so. Indeed, using a sender-receiver game (Crawford and Sobel, 1982), Gneezy (2005) finds a statistically significant level of lying aversion 1. He shows that the higher their potential gains the more likely it is that senders will lie and that they are less likely to lie the more their lying results in a loss to the receiver. In subsequent work, Erat and Gneezy (2012) find that a large fraction of subjects refrain to tell even a Pareto white lie, strengthening the existence of lying aversion independent of any social preferences over outcomes. 2 Hurkens and Kartik (2009) stress the importance of isolating lying costs in studying deceptive behavior, but confirm the existence of lying aversion in a sender-receiver game. Gibson et al. (2013), using a lab experiment where each participant acted as a CEO and had to announce his firm s earnings to a passive market, show that the percentage of truth tellers decreased as the costs of truthfulness increased (i.e. had lower firm earnings). Nevertheless, around 32% of subjects always tell the truth. Also, Gneezy et al. 1 The behavior in a sender-receiver game is compared to the behavior in a dictator game. As lying was monetarily costless, both games should yield the same outcome, which did not happen. 2 Specifically, Erat and Gneezy (2012) introduce selfish black lies, altruistic white lies, and Pareto white lies. 1

3 (2013) show that if the gains from lying are higher subjects more frequently lie, but around 33% of subjects are always truthful. In a real setting, Abeler et al. (2014) call participants at their homes in Germany and ask them to toss a coin and report either heads or tails. Reporting tails gives a payoff of 15 euros, while reporting heads yields no payoff. Surprisingly, the results show that observed behavior is not statistically different from everybody reporting honestly. 3 Two remarks are in order regarding the extant literature. First, it considers a setting where randomly selected anonymous subjects interact with each other. Second, in the frequently used sender-receiver experimental games, subjects in the role of senders are restricted to make one binary choice: either tell the truth or tell one specific type of lie only. Although economic theories are impersonal, in reality individuals often interact repeatedly with others and establish friendship ties and, in their interactions, are free to choose whether to tell the truth or tell one of the distinct types of lies as discussed previously. Our paper extends on the previous literature investigating deception behavior in a context where socially connected individuals make multiple decisions concerning different kinds of lies. Specifically, we classify lies as: a selfish black unfair (fair) lie if it increases a players payoff at the expense of the other player, while implementing inequity (equity); an altruistic unfair (fair) lie if it decreases a players payoff, while 3 See also Sánchez-Pages and Vorsatz (2007, 2009) that, by allowing senders to remain silent, confirm that the truth-telling behavior in the sender-receiver game can be attributed to lying aversion. Lundquist et al. (2009) consider a bargaining game with one-sided asymmetric information. Before the actual game, the seller participate in a performance test. The test results are then reported to the buyer. Lying aversion is also a main result of their experiment, with the aversion being higher the higher the size of the lie. Using a die-rolling game, Fischbacher and Follmi- Heusi (2013) report that around 39% of subjects were honest when reporting the outcome, which determined their payment. Rosaz and Villeval (2012) consider deceptive behavior in a labor market experimental setting in which not all, but one third of supervisors are shown to bias the feedback about workers performance in a real effort task. research has also been conducted to explore the reasons for lying aversion. For instance, Charness and Dufwenberg (2006) identify guilt aversion as an important inhibitor of lying and Wang et al. (2010), with the support of eyetracking data, show that there is a cognitive cost of lying. 2

4 increasing the other players payoff and creating inequity (equity); a Pareto white lie if it increases both players payoff; and a spiteful black lie if it decreases both players payoff. Consequently, not only are we able to investigate the existence of lying aversion, but also explore to whom individuals lie, which lies they are willing to tell, and how often they lie. As simple as they appear, the extensions we propose are far from trivial. Consider first the friendship ties. As friendship relations may facilitate detection of dishonest behavior, truth-telling behavior is likely to be more often observed among socially connected individuals and, as such, the extant experimental evidence can be seen as providing a lower bound on individuals aversion to lie. This conclusion is not, however, straightforward. The aversion to lie is not only dependent on whom individuals are interacting with but on the type of lie that can be told. Although individuals may refrain to tell a lie that would hurt their friends 4, it is not clear whether they would be more willing to lie altruistically to friends relative to strangers. According to a pluralistic moral view, individuals have different duties such as not lying, keeping promises, gratitude, and beneficence. If telling the truth is in conflict with one of these other duties, individuals may choose to lie and, depending on how individuals judge their duties, different degrees of lying aversion may emerge. In fact, as other-regarding preferences seem to be stronger between physically and emotionally connected individuals than between strangers, 5 the following questions 4 Unconditional selfish money maximizer individuals may have no aversion to lie to a stranger but, in case of suffering some desutility from being caught lying, they may refrain to do so to their friends. 5 For example, Hoffman et al. (1996) investigate how social distance influences fairness. They find that subjects have preprogrammed and unconscious rules of social exchange behavior when they interact with other subjects. They suggest that a decrease in perceived social distance increases donations in dictator games. Bohnet and Frey (1999) find that closer social distance increases the fairness of the outcome. Polzer et al. (2009) compare allocations to friend and stranger in an ultimatum game. They report that friend demands significantly less to reach an agreement than stranger. Glaeser et al. (2000) match subjects at various social distances in a trust game and find that closer social distance increase both trust and trustworthiness. Leider et al. (2009) report that 3

5 arise naturally: how is individuals lying behavior affected by a potentially higher duty of fairness towards their friends? Or, alternatively, how is the preference for fairness affected by a potentially higher duty of honesty? Also, consider the binary choice that subjects in the role of senders face in the sender-receiver game. When subjects are restricted to choose between the truth and a lie, a two-fold classification of subjects arise. Individuals can be classified as either moral types (never lie) or economic types (lie whenever the allocation from lying is preferred). In our view, this classification is simplistic and mainly driven by design. A large spectrum of individuals weighs the costs and benefits from lying, and the propensity to lie depends on the tradeoff one faces. As Lundquist et al. (2009) show in a bargaining game with one-sided private information, when people are not constrained on the message they can send, fewer lies are observed. Therefore, by allowing individuals to make multiple choices and choose which lie to tell, we are able to reduce the type II error that exists in the previous classification and more accurately infer the intensity of lying aversion in a laboratory setting. Our experimental design consists of a modified sender-receiver game with four possible true states and four possible monetary payoffs for both the sender and the receiver in each of those states. By using the strategy method (Selten, 1967), we elicit senders messages for each possible true state. The sender may lie or tell the truth and the sender s message is binding. Therefore, in our experiment the receiver has no choice to make. This way we exclude, by design, any possibility for strategic lying by the sender. 6 Before subjects play the actual sender-receiver game, we implement a directed altruism increases giving to friend by 52 percent relative to random stranger. Reuben and van Winden (2008) use between-subject design in a three-player power to take game to investigate the effect of social distance on negative reciprocity. They find friends are more likely to punish the proposer and more likely to coordinate their punishment. 6 Sutter (2009) reveals the existence of sophisticated deception in a sender-receiver game. This behavior arises whenever the sender does not expect to be believed. If that is the case, and if the sender wants to implement the truth (a lie), he tells a lie (the truth). 4

6 modified dictator game. This first stage aims at obtaining the ranking of preferences of senders for each of the four allocations. 7 To investigate the relationship between friendship ties and lying behavior, we consider two treatments: (1) a treatment where subjects do not know each other (the strangers treatment) and (2) a treatment where pairs of friends play together (the friends treatment). We wish to underscore that our experimental design makes a methodological contribution to the extant literature on lying aversion. The modified sender-receiver game we implement not only eliminates strategic deception but, more importantly, also solves an identification problem in the following way: It allows us to directly distinguish between lying aversion and outcome oriented social preferences, without the need for explicitly eliciting social preferences. So, for instance, the number of lies a subject tells is, in our experiment, a sufficient statistic to infer the subject s lying aversion. Recall that, in our design, senders have to first choose among the four monetary allocations the allocation to be implemented in each of the four possible true states. Note that, independent of any distributional concerns, the truth is incentive compatible only once. Therefore, if we observe less than three lies from a given subject, we can safely infer that this particular subject has procedural preferences, and exhibits lying aversion, at least to a certain degree. In addition, we also capture a more accurate distribution of lying behavior. Subjects with a high degree of lying aversion will never lie and subjects with an intermediary degree of lying aversion will lie less than three times. The economic types in our experiment consist of either those individuals with a sufficiently low degree of lying aversion or those who lie whenever they have an incentive for doing so. The economic types 7 So, for instance, if the four possible allocations are denoted as A, B, C and D, one sender may rank her preference as C, B, D, A while another sender may rank his preference as D, C, A, B... and so on with each of the other senders. The bottom line is that each sender will reveal her distinct ranking preference before the start of the main experiment. 5

7 are then expected to lie 3 out of 4 times. 8 Moreover, by comparing the messages chosen in the sender-receiver game to those same individuals ranking preferences from the modified dictator game, we can study the relationship between the type of lies individuals decide to tell and their respective social preferences. Our findings are as follows. In line with the previous studies, we find that subjects have procedural preferences and that a significant proportion of individuals are averse to lying. However, our results indicate that individuals lie if the benefits from lying compensate the moral costs of doing so. Our data shows that 15% of individuals never lie, 35% are economic types and lie whenever they have an incentive to do so, and 50% exhibit a certain degree of lying aversion that restricts them from implementing their most preferred outcome. Also, we establish a relationship between social preferences and lying behavior. First, fair (or, inequity averse) subjects seem more lying averse than selfish types and, second, the different pattern of lies is explained by the heterogeneity in individuals social preferences. Conditional on gains and losses for themselves and others, individuals are more willing to lie when lying implements an equal allocation. Related to friendship ties, we show that friendship significantly affects behavior. First, individuals are less likely to tell a lie in the friends treatment. In particular, we observe a significantly higher (significant at the 0.01 level) proportion (40%) of individuals that never lie in the friends treatment as compared to the strangers treatment (15%). Second, despite 30% of subjects who lie to a friend (compared to 33% who lie to strangers) whenever they have an incentive to do so, they tell significantly fewer selfish lies (relative to selfish lies in the strangers treatment). 9 Using a within-subject design, we find that all the above results are 8 Another way of expressing this is to say that economic liars will tell a lie whenever they have an incentive to do so. 9 Specifically, 44% of the lies are selfish lies in the friends treatment and 67% of the lies are selfish lies in the strangers treatment. The difference is significant at the 0.01 level. 6

8 robust when the same subjects play both with strangers and with friends. The remainder of this paper proceeds as follows. The next section presents our experimental setup and the main differences from earlier experiments. Section 3 discusses the behavioral predictions. Section 4 presents the experimental procedures. The main features of the data and the empirical results are presented in Section 5. Section 6 discusses the robustness of the results. Section 7 summarizes and concludes. 2 Experimental setup Our setting comprises a non strategic, four-outcome version of the cheap talk senderreceiver game by Crawford and Sobel (1982). In our game, there are four equally likely states of the world, A, B, C, andd. Each state is mapped into four possible payoff allocations for both the sender and the receiver. Table I shows the payoff allocations. Nature moves first and determines the true state. The sender, and only the sender, is informed about the true state and sends a binding message to the receiver from the set of possible states. The sender can either tell the truth or lie. The message determines which of the four payoff options is implemented. The sender knows the payoff allocations but the receiver is never informed about what these may be. Table I ALLOCATION PAYOFFS A (20, 20) B (15, 30) C (30, 15) D (25, 25) As alluded to earlier, each subject participates sequentially in two independent games. The first one is a ranking game and the second is a message game that 7

9 implements our modified sender-receiver game. The ranking game itself is a modified dictator game in which senders reveal their distributional preferences regarding the four specified payoff allocations for both the sender and receiver. The ranking choice is incentive-compatible with the highest ranked allocation having the highest probability of being implemented. In particular, there is a 50% chance that players payoffs in the ranking game are given by the sender s first preferred option, 25% chance that players payoffs are given by the sender s second preferred option, 15% chance that the senders payoffs are given by the sender s third preferred option, and 10% chance that the senders payoffs are given by the sender s fourth preferred option. 10 Our treatment variable is the friendship ties that exist between the sender and receiver. We compare two different treatments. One, the baseline, is the strangers treatment (strangers) where participants are anonymously and randomly matched to another participant. The other treatment is the friends treatment (friends) where each participant is required to bring a friend to the experiment. Pairs of friends remain matched throughout the whole duration of the experiment. It should be noted that our design relates closely with that of Erat and Gneezy (2012). Like the subjects in their experiment, our subjects play the sender-receiver game only once. However, there are important differences between their design and ours. First, we employ a non strategic version of the sender-receiver game which eliminates the possibility of sophisticated deception given that the receiver has no decisions to make. In our setting, the sender s message is binding and both the receiver s, and sender s, payoffs are determined by the sender s message Our choice of these relative probabilities reflects our desire to incentivize the subjects in revealing their true outcome preferences and in their understanding that their first choice will be selected with a high likelihood. By the same token, we did not wish to put very little weight on subjects third and fourth preferred outcomes to ensure that these did not become random choices. In that sense, these probabilities could be tweaked a bit without significantly altering the ranking outcome displayed by the subjects. 11 In the Erat and Gneezy (2012) setting, the sender observes a roll of 6-sided dice and sends a 8

10 Second, we do not have the same allocation associated with the true state. In other words, our design allows for the true state to be subject specific in that each state of nature in our setting is mapped into a different allocation. In order to observe a sender s truth telling behavior in different true states we use the strategy method (see Selten, 1967). That is, senders, before observing the true state, have to indicate, for each potential true state, which message they want to send. The main advantage of using the strategy method is that, by getting the sender to pick a vector of messages, we are able to disentangle lying aversion from outcome oriented social preferences in a straightforward way. We discuss this topic in detail in the next section. From a game-theoretic perspective the use of the strategy method is comparable to the direct method, in which subjects would make a single choice only for a realized true state. Behaviorally, it may affect subjects behavior (see, for example Brosig et al., 2003; Güth et al., 2001). A priori, there is no reason to think that truth-telling behavior would be affected one way or another by the use of the strategy method, or that there would be an interaction effect between the use of the method and our treatment variable friendship. Also, a number of experimental studies show that the elicitation (i.e., strategy versus direct) method has limited impact on people s behavior, especially in low complexity settings, which is the case in our non-strategic version of the sender receiver game (see Bosch-Domnech and Silvestre, 2006; Brandts and Charness, 2000; Cason and Mui, 1998;?; Oxobyand McLeish, 2004). Also, we consider four payoff allocations instead of two, which allows us to investigate not only whether subjects lie or tell the truth but also the types of lies non-binding message about the outcome of the roll of the dice. The receiver is asked to pick an integer between 1 and 6 and, if the number equals the true outcome, then option A is implemented, otherwise option B is implemented. The 6-sided dice is used to reduce the strategic lying that can potentially exist in the two-state setting (Gneezy, 2005). 9

11 subjects choose to tell. In our design, the combination of four possible true states and the four final payoff allocations allow us to classify the type of lies not only according to the gains and losses incurred by both the sender and the receiver but also according to the fairness of the final allocation.consistent with Erat and Gneezy (2012), we classify lies as: selfish black unfair (fair) lie if it increases a player s payoff at the expense of the other player, while implementing inequity (equity); an altruistic unfair (fair) lie if it decreases a player s payoff, while increasing the other player s payoff and creating inequity (equity); a Pareto white lie if it increases both players payoff; and a spiteful black lie if it decreases both players payoff. 3 Behavioral Predictions 3.1 The intensity of lying Do subjects lie? How often do they lie? Do they lie more to friends or to strangers? We operationalize our predictions in terms of two approaches. First, there is the outcome oriented approach that assumes individuals care only about final outcomes. Second, there is the procedural/moral approach where individuals are assumed to care about the process through which outcomes are generated and, in particular, whether the path itself is consistent with their moral beliefs. If individuals focus merely on outcomes (outcome oriented subjects), their cost of lying is zero and we expect them to lie whenever they have an incentive to do so (this case corresponds to the economic types in Hurkens and Kartik (2009)). However, the incentives for lying may differ across individuals. Selfish agents who care only about their own monetary payoffs tell lies whenever it gives them a better outcome, regardless of the consequences for others. Also, pro-social agents are willing to tell 10

12 a lie to implement an altruistic, more equal, or more efficient allocation, depending on their social preferences. 12 The use of the strategy method, by eliciting a vector of messages for each individual, allows us to draw a clear prediction in those cases where people have preferences over payoff allocations. Under this assumption, within our experiment, the truth is incentive compatible only once - when it coincides with an individual s most preferred allocation. Regardless of whether one is selfish or prosocial, everyone has an incentive to lie a maximum of three times to implement her preferred allocation. There should be no differences in the proportion of lies between the strangers and the friends treatments. Alternatively, consider that individuals have procedural and/or moral preferences. In this case, when deciding whether to tell a lie or tell the truth, individuals will judge the morality of their actions and act accordingly. 13 In case the morality of lying is determined by its consequences, lying is right if and only if it leads to at least as much good as telling the truth. Consistent with our earlier discussion, we would expect that pro-social subjects will lie to implement their preferred good allocation. Selfish subjects, on the other hand, may refrain from telling a selfish black lie. However, given our four-outcome sender-receiver game, it does not mean that they will not lie at all. A selfish subject who cares about the consequences of lying can 12 Formally, pro-social behavior involves caring about the welfare and rights of others, feeling concern and empathy for them, and acting in ways that benefit others. 13 The philosophical underpinnings of our investigation can be traced back to the theory of Consequentialism that holds that the consequences of one s conduct are the true basis for any judgment about the morality of that conduct. From a consequentialist s standpoint, therefore, a morally right act is one that will produce a good outcome, or consequence. This view is often captured in the saying: The ends justify the means. Distinct from consequentialism is the idea of deontology that distinguishes the rightness or wrongness of one s conduct from the nature of the behavior itself rather than the outcomes of the conduct. The differences in the two approaches lie more in the way moral dilemmas are approached than in the moral conclusions reached. As a practical example, a consequentialist may argue that lying is wrong because of the negative consequences produced by lying, though certain foreseeable consequences might make lying acceptable. A deontologist, on the other hand, might argue that lying is always wrong, regardless of any potential good that might come from lying. 11

13 lie in a morally acceptable way, for instance, by implementing his second preferred choice. 14 Therefore, similar to an outcome-preference, subjects in our experiment are expected to lie three times in both the strangers and friends treatments. In case subjects have a positive unconditional moral view against lying, they will trade off the benefits from lying with the moral costs of doing so and act accordingly. If the cost is very high, as in case of extreme moral concerns, we expect these subjects to never lie. If, on the other hand, the costs are moderate, the corresponding subjects probabilities of lying will decrease with the ranking order of their true allocation. In other words, their probability of lying will increase with the net benefit of doing so. 15 Moreover, if the moral principle of not lying is considered to be universal, and not selectively applied to people or acts, we should observe no differences between treatments. A less strict, pluralist, moral view assumes individuals have different duties among which fidelity (not lying, keeping promises), gratitude, and beneficence (do good to others) play important roles. A lie is morally wrong, but in case of conflict with some other duty (for instance, being fair to someone else), individuals may lie. Depending on how individuals judge their duties, we may observe individuals not lying at all, or doing so less than three times within the context of our experiments. Under this less strict morality view, differences may be found between friends and strangers treatments if the duty of gratitude for instance surpasses the duty of being 14 This is in line with guilt aversion. Under guilty feeling individuals get disutility from hurting others. 15 Under procedural moral preferences individuals may suffer a negative utility from the act of lying. Similarly, individuals may derive an extra utility for being honest. It is not our purpose in this paper to distinguish between these two preferences. 12

14 honest. 16, The pattern of lies We expect that subjects will tell different lies to friends relative to strangers. One reason behind this prediction is the existence of other-regarding preferences (or otherregarding moral duties) and the extent to which those preferences may vary with friendship ties. In fact, extant experimental evidence indicates a more pro-social behavior towards friends than to strangers. For instance, Leider et al. (2009) show that, under anonymity, subjects give at least 50% more surplus to friends than to strangers. However, when decisions are non-anonymous, transfers increase an additional 24% to friends in games with efficient transfers. Their results suggest that it is not just the prospect of future interaction that is behind the more pro-social behavior towards friends but that people s baseline altruism seems to be higher for friends as well The moral unconsequentialist approach corresponds to the deontological approach in moral ethics field of philosophy. The first, more strict moral view corresponds to the absolute deontological moral system (see work of Emmanuel Kant), which is characterized by individuals adherence to independent moral duties, and the duty of honesty is primordial. The second, less strict moral view corresponds to the pluralist deontological system, which is characterized by a multiplicity of duties (see the work of W. Ross). Another ethical moral approach is virtue ethics. It emphasizes the moral character of the actor in contrast to duties or the consequences of actions. Under this approach is less clear in which cases lies are permissible. 17 Both consequentialism and utilitarianism are, however, silent about relational considerations. There is a general notion that certain relationships between people (for example, family, love, and friendship) engender ethical obligations. And we may strengthen them with the appropriate consequentialistic or utilitarian underpinnings. Relationships do not add anything new to these fundamental ways of thinking but, rather, in certain circumstances, reinforce their considerations. For the rule utilitarian moral types, lying to a friend is worse than lying to strangers, but friendship as such does not dominate over the duty of honesty. It merely reflects a moral consideration, which waxes and wanes depending on whom we are relating to. 18 Polzer et al. (2009) compare allocations to friends and strangers in an ultimatum game. They report that a friend in the role of a receiver demands significantly less to reach an agreement than a receiver stranger. Glaeser et al. (2000) match subjects at various social distances in a trust game. They find that closer social distance increase both trust and trustworthiness. Reuben and van Winden (2008) investigate the friendship effect on negative reciprocity and show that in a three-player power-to-take game friends are more likely to punish the proposer and more likely to 13

15 In our experiment, we can infer our subjects social preferences for friends and strangers by comparing their choices in the ranking game in both treatments. In Appendix B, we formally present predictions for the ranking game under inequity aversion and quasi-maximin preferences. 19 Concerning the pattern of lies, assume, first, the case where subjects care only about final allocations. A selfish type, and someone who does not care sufficiently about the well-being of others, will always lie if the true allocation does not maximize her own earnings. Therefore, these selfish agents will lie whenever the truth differs from allocation C. If individuals have altruistic preferences, dislike inequality, or have concerns about social welfare, they will prefer allocation D, and they will lie in all other circumstances. In case individuals exhibit more pro-social behavior towards friends, we expect to observe more selfish black lies in the strangers treatment relative to the friends treatment. Second, if subjects have moral concerns and exhibit stronger moral duties to friends, we expect less selfish lies, in the friends treatment in particular. Another explanation for the different pattern of lies across treatments may be due individuals concerns for social esteem. While procedural-moral preferences may create an internal pressure in individuals for telling the truth, or only certain types of lies, the concern for social esteem may work as an external motivator. In case individuals care about social esteem, they may suffer a non-pecuniary cost from criticism, ostracism from others, loss of friendship, and/or feelings of shame when they do not behave properly and such inappropriateness can be observed by others. In our experiment, subjects choices are unobservable by other subjects in both coordinate their punishment. 19 Note that our non-anonymous friends treatment provides the total effect of playing with a friend i.e., the combination of reputation considerations and the potential increase in intrinsic social preferences. 14

16 treatments. Nevertheless, concerns for social esteem may arise (in expectation) in the non-anonymous friends treatment relative to the anonymous stranger treatment. For one, subjects may talk about the experimental results, and their choices, once the experiment ends. Moreover, not only does anonymity vary between treatments but the relational ties between subjects also differ. And if subjects receive utility from what they think a general other thinks about them, they may get even more utility from their friends judgment of their behavior and/or character Experimental procedures Our experimental sessions were conducted in the Vernon Smith Experimental Economics Laboratory at Purdue University during June, August, and September of We used the z-tree software (see Fischbacher, 2007) modified appropriately for our purpose. Subjects were mainly undergraduates from disparate fields. On average, a session lasted 50 minutes and the participants earned, on average, $14 dollars. We conducted 6 sessions. Three of them comprised the Strangers treatment (76 subjects) and the remaining three sessions comprised the Friends treatment (68 subjects). For the Strangers sessions, subjects were recruited individually and, at the beginning of the experimental session, were randomly and anonymously matched with another subject and remained matched with this subject for the duration of the session. For the Friends sessions, we recruited pairs of students that had a friendship tie and each pair of friends remained together for the duration of the session. In all sessions, subjects participation comprised of two parts. Part I 20 For experimental studies on social esteem see Andreoni and Bernheim (2009), Cox and Deck (2005), Dana et al. (2006), Hoffman et al. (1996), and Tadelis (2011). 15

17 implemented the Ranking Choice condition and part II implemented the Message Condition. Given the non-strategic setting of both conditions, subjects were asked to make decisions for both part I and part II assuming a sender s role. Subjects were informed that after they played part I and part II, half of the participants would be assigned the role of sender and, the other half, the role of receiver, and that only the decisions made by those in the role of a sender would be implemented. Subjects started the experiment with general on-screen instructions followed by instructions for part I. They also received a summary of the instructions on paper for part I (see Appendix A). To ensure the experiment was understood, subjects had to answer three quiz questions correctly before part I started. Thereafter, all subjects made their ranking decisions for part I. When part I was over and before learning about their earnings for this part, everyone received on-screen instructions for part II, as well as a summary of the instructions on paper (see Appendix A). Part II started after everyone answered three quiz questions correctly. All subjects then made decisions for part II. Recall that subjects had to choose which message to send for every potential true state before knowing the actual truth. In particular, each subject had to state which message she wanted to send to the receiver for each possible true state - A, B, C, D - each one corresponding to a payoff allocation (see Table I). The subject could either lie or tell the truth. The other person was never informed as to whether the sender is telling the truth or lying. When everyone had made their decisions, subjects were informed about the actual true state. At the end of part II, subjects learned their role (sender or receiver) in the whole experiment. Subjects who were selected to be senders had their decisions for part I and part II implemented. In particular, if a subject was selected to be a sender, her earnings, as well as the other person s earnings, were determined by her decisions; if 16

18 the subject was selected to be a receiver, her earnings, as well as those of the other parties earnings were determined by the other parties (sender) decisions. At the end of the experiment, after roles were revealed, the experimenter rolled two 10-sided dice in front of each sender to select his/her earnings for part I in the following way. If the dice roll turned out to be less than or equal to 50, the sender s first option was implemented; if the dice roll was higher than 50 but less or equal to 75 the sender s second option was implemented; if the dice rolled was higher than 75 but less than or equal to 90, the sender s third option was implemented; if the dice roll was higher than 90, the sender s fourth option was implemented. The receiver was only informed about his/her earnings for part I and never informed about the sender s ranking. For part II, the receiver never observed the vector of the sender s messages nor the truth state but only the message corresponding to the actual truth and its corresponding payoff. At the end of the experimental session, subjects learned of their payoffs for parts I and II. No subject was ever informed about the choices of subjects in other groups. Next, each participant learned of his/her own earnings in dollars, filled a background questionnaire, and was individually, and privately, paid. 5 Empirical findings 5.1 The intensity of lying The proportion of lies observed in both treatments is provided in Figure I. In the strangers treatment, there are 144 (47.4%) lies among a total of 304 messages. In the friends treatment, the total number of lies were 90 (33.1%) out of a total of 272 messages. As can be seen in figure 1, the proportion of lies in both treatments is 17

19 significantly below 75% (also confirmed by a one-sided Binomial test, p = 0.001). Therefore, individuals tell, on average, fewer than three lies, which indicates that, on aggregate, individuals do not behave as standard economic agents or as if they have exclusively outcome-oriented social preferences. Individuals seem to dislike lying, independent of the consequences of the act. On average, however, our univariate results reveal a degree of lying aversion, that is stronger for friends than it is for strangers. Figure I PROPORTION OF LIES BY TREATMENT % strangers friends The difference between the proportion of lies in both treatments is statistically significant (one-sided binomial test; z = 1.74, p < 0.05). To further explore this result, we conduct a regression analysis of the likelihood of lying. Specifically, Model I provides the effects of the treatment dummy variable friends. Model II adds dummies for each possible true state (A being the excluded category), and the interaction terms between the true state and the friends dummy as controls. To account for the panel structure in our data (four messages for each subject) we estimate a random effects probit model. 18

20 Table II presents the results. First, our results confirm those obtained with the binomial test: subjects in the friends treatment are less likely to lie than those in the strangers treatment (Model I, p =0.004). Also, when the true outcome is A, our results show that subjects do not lie significantly more in the friends treatment relative to the strangers treatment. However, the probability of lying decreases significantly in the friends treatment as compared to the strangers treatment when the true state is D rather than A. In the strangers treatment, the probability of lying increases if the true state is B instead of A and decreases if the true is C instead of A. The same happens in the friends treatment although the differences between treatments are not statistically significant. 21 Table II RANDOM EFFECTS PROBIT REGRESSION WITH LYING AS DEPENDENT VARIABLE Model I Model II Coef. Std. Err. Coef. Std. Err. constant friends B C D friends*b friends*c friends*d *** Indicates significance at the 1%-level. There are N = 576 observations in total, with 144 individuals and 4 observations per individual. The Wald statistic equals χ 2 =8.52; p = in Model I and χ 2 =76.28; p = in Model II. The emergent aggregate picture presented above hides individual behavior and possible heterogeneity. Not all individuals display lying aversion and some individuals are willing to lie whenever the true allocation differs from their preferred one. Table III shows the frequency of lies. Despite a considerable portion of 21 Background variables, such as gender and race are insignificant and hardly affect the other coefficient estimates. We therefore provide a simpler model specification. 19

21 subjects appearing to behave as per the dictates of standard economic theory, about 33% (29%) of individuals lie three times in the strangers (friends) treatment. These percentages are significantly distinct from 100% (one-sided Binomial test, p<0.0014). The majority of subjects display a certain degree of lying aversion. For instance, in the strangers (friends) treatment, 65% (71%) of the subjects lied less than three times. A chi-square test reveals that there are significant differences in the frequency distribution of the number of lies told between the strangers and friends treatments (p < 0.001). The difference between treatments increases in particular for those who never lie. In the strangers treatment, 15% of the subjects never lie. A considerably larger proportion of those moral types is found in the friends treatment. For example, about 40% of individuals never lie to a friend (onesided Binomial test, p =0.004). Table III FREQUENCY OF LIES BY TREATMENT Never Once Twice Three times Always Strangers N= % 19.7% 30.3% 32.9% 2.6% Friends N= % 17.6% 13.2% 29.4% 0% The dispersion in the frequency distribution of the number of lies shows that individuals are heterogeneous. In one extreme, those with a low cost of lying, lie whenever the true outcome differs from their first ranked preference. At the other extreme, moral individuals with a high cost of lying, never lie. In between, there are those individuals whose gains from lying increase if the true outcome is distanced further from their preferred choice. The data appears to support this contention. 20

22 The correlation between ranking preferences, and the frequency of lies, is high for those who lie once or twice (the intermediate liars; see Table C.1, Appendix C). Next, we investigate the relationship between lying aversion and social preferences. First, in order to consider social preferences, we classify subjects according to their first ranked choice in the ranking game. 22 We expect the following. If individuals are selfish, or they attribute a low weight to others payoffs, they would rank C (30, 15) as their first choice; alternatively, if individuals are sufficiently inequity averse, and/or care about total surplus, they would rank D (25, 25) as their first choice. Pure altruistic individuals would choose B (15,30) as their preferred allocation. Table IV presents the proportion of subjects who chose a particular allocation as their most preferred option in the ranking game. In the strangers treatment, there are 51% subjects that prefer the selfish allocation C and 43% that prefer the fair allocation D. The percentage of subjects that prefer the allocation D in the friends treatment is higher and equals 72% and relatively few subjects show selfish preferences towards a friend (9%). Also, to analyze lying aversion, we present, for each group of subjects, the proportion of lies told in relation to the number of lies that subjects would have told if they had lied whenever they had an incentive for doing so, i.e., three times. Independently of any social type, the proportion of lies is lower than 1, and smaller in the friends treatment, as compared to the strangers treatment. Moreover, fair-minded subjects appear to lie less than the selfish types. We explore this finding further in Section 6.2 when considering a within-subject experimental design. 22 In Appendix A we present the full ranking predictions for inequity aversion preferences (Fehr and Schmidt, 1999) and Quasi-maximin preferences (Charness and Rabin, 2002). Table C.2 in Appendix C presents the distribution of allocations choice by ranking preference. 21

23 Table IV PROPORTION OF SUBJECTS AND LIES (IN RELATION TO THE INCENTIVE COMPATIBLE LIES) BY SUBJECTS MOST PREFERRED OPTION A B C D (20,20) (15,30) (30,15) (25,25) Subjects (N=76) (3) (1) (39) (33) Strangers Incentive compatible lies 0.33 (3) 0 (0) 0.61 (71) 0.53 (52) Subjects (N=68) (10) (3) (6) (49) Friends Incentive compatible lies 0.23 (7) 0.22 (2) 0.61 (11) 0.44 (65) * The proportion of lies is computed with respect to the number of lies that would have been told if subjects would have lied three times. Lies proportions can be compared to 1 (we exclude lies in case the truth coincided with subject s most preferred allocation). 5.2 The pattern of lies To understand individuals motivations for lying we investigate their pattern of lies. In particular, we examine the messages sent by those who lied.table V provides the results. As compared to strangers, friends are more likely to lie for a fair outcome while they are less likely to lie for their own gains if they come at the cost of their friends loses. In particular, a significantly higher proportion (44%) of lies in the strangers treatment involve switching to message C, the selfish allocation (30, 15). A significantly smaller fraction (7%) of lies involve switching to the same message in the friends treatment (one-sided Binomial test, < 0.001). In contrast to this finding, we show that there are 80% of lies in the friends treatment that implement the fair allocation (25, 25) a percentage that is significantly higher than the 44% observed in the strangers treatment (one-sided Binomial test, p<0.001). 22

24 Table V UNCONDITIONAL MESSAGES SENT BY LIARS Number A B C D of lies (20,20) (15,30) (30,15) (25,25) Strangers (4.9%) 10 (6.9%) 64 (44.4%) 63 (43.8%) Friends 90 7 (7.7%) 5 (2.6%) 6 (6.7%) 72 (80.0%) In order to further investigate the pattern of lies observed in our experiment, we adopt the Erat and Gneezy (2012) approach and classify lies according to the gains and losses for both the sender and receiver that results, within our experiment, in the sender choosing an allocation that is different from the truthful one. Recall that in our sender-receiver game we have four possible true states and four possible final allocations. As such, we may have one type of lie associated with a certain level of gains and losses resulting from different combinations of true outcome and the corresponding message sent. For example, a lie that results in a loss of 5 for the sender and a gain of 10 to the receiver can result, within our experimental design, in a truth state of A, (20, 20), and an actual message sent equal to B, (15, 30), as well as from a true state equal to C, (30, 15), when the actual message sent happens to be equal to D (25, 25). Given this, we classify lies not only according to gains and losses but also according to the fairness of the final outcome given the true allocation. Specifically, a fair (unfair) lie moves a sender and receiver from a state of unequal (equal) outcome to a state of equal (unequal) outcome for both. Table VI presents the fraction of lies per type of lie for both treatments. 23 The pattern of lies told by subjects is significantly different between treatments (χ 2 test, p < 0.001). For instance, there is a significantly lower proportion of 23 In the Appendix C, Table C.3 shows the proportions of messages sent by true state and treatment. The diagonal shows the proportion of subjects that told the truth for each true state. 23

25 altruistic lies in the strangers treatment as compared to the friends treatment (20% vs. 29%, z = 1.320, p =0.094). More specifically, individuals are willing to forgo 5 experimental units in order to increase the others payoffs by 10 experimental units. This implies that individuals do care about the others payoffs and that they are willing to lie when lying implements a relatively equal allocation. When the true allocation is A, (20, 20), individuals can tell a Pareto white lie by sending message D, (25, 25), yielding each participant 5 extra experimental units. In the strangers treatment, 13% of the lies resulted in a Pareto improvement, while this percentage equals to 26% in the friends treatment (z =1.1630, p =0.122). A larger proportion of lies told in both the strangers and friends treatments was of the selfish kind since they increase the sender s payoff at the expense of the receiver s. The proportion of selfish lies was 44% in the friends treatment, which is significantly smaller than the 67% in the corresponding strangers treatment (z =2.6128, p =0.005). However, not all of the selfish lies should be considered equally selfish and the fairness of the final allocation should also be considered. From all selfish lies in the strangers treatment, 45% implemented an unequal allocation that favored the sender while only 22% implemented a fair allocation. In the friends treatment, however, only 7% of the selfish lies could be considered unfair, while 38% implemented an equal allocation. 24

26 Table VI PROPORTION OF LIES PER TYPE OF LIE BY TREATMENT Fairness Gains/Losses True Final Strangers Friends of outcome [sender,receiver] allocation allocation (144 lies) (90 lies) Altruistic unfair [-5,10] A(20,20) B(15,30) 0.7% 3.3% lie fair C(30,15) D(25,25) 11.8% 21.1% unfair [-10,5] D(25,25) B(15,30) 1.4% 1.1% fair C(30,15) A(20,20) 0.7% 2.2% fair [-15,15] C(30,15) B(15,30) 4.9% 1.1% Selfish unfair [5,-10] D(25,25) C(30,15) 13.9% 0.0% lie fair B(15,30) A(20,20) 3.5% 4.4% unfair [10,-5] A(20,20) C(30,15) 14.6% 4.4% fair B(15,30) D(25,25) 18.8% 33.3% fair [15,-15] B(15,30) C(30,15) 16.0% 2.2% Pareto white lie [5,5] A(20,20) D(25,25) 13.2% 25.6% Spite black lie [-5,-5] D(25,25) A(20,20) 0.7% 1.1% Next, we investigate whether different lies can be explained by the differences in social preferences. Figure II shows the proportion of subjects that are classified as selfish, inequity averse, and altruistic, according to their ranking preferences. Figure II also presents the proportion of subjects who tell the truth for allocations C, D, and B, the average proportion of subjects who tell a lie in order to implement allocations C, D, and B 24, and the proportion of subjects who never lie. As stated before (see Table IV), there are more selfish types in the strangers treatment and more inequity averse subjects in the friends treatment. Therefore, a part of the truth-telling behavior is explained by social preferences. However, more people appear to stick to the truth relative to those who have an incentive to do so. We highlight two additional observations. First, there are very few subjects who rank B as their first choice but, by the same token, a considerable fraction of subjects also 24 In case of a lie, for each allocation, C, D, and B, we average the number of subjects that lie for each of the other three possible allocations. 25

27 Figure II CLASSIFICATION OF SUBJECTS ACCORDING TO THEIR SOCIAL PREFERENCES AND THEIR LYING BEHAVIOR % of subjects 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Strangers Friends do not lie when B happens to be the true allocation (28% and 47% in the strangers and friends treatments, respectively (z = 2.422, p = 0.008). Discounting those who never lie (15% and 40% in the strangers and friends treatments), it remains that 13% of the subjects in the strangers treatment, and 7% of the subjects in the friends treatment who could have lied chose to not do so. Therefore, there are subjects who do not lie if this lie happens to reduce the other person s payoff. A second interesting finding relates to those who choose to stay with the truth when it equals C. Subjects seemed to prefer fair allocations when they played with a friend. However, a majority also did not lie when the unfair allocation, C, happened to be the true allocation. For a majority, the duty of not lying seems to be more important than their perceived duty for being fair. Additionally, there appear to be no significant differences between treatments. When the true outcome was C, (30, 15), there was no significant difference between strangers telling the truth and friends telling the truth (67% vs. 68%, z = 0.064,p =0.475). However, there 26