Truth and Deception

Abstract

Organizations rely on languages that imperfectly represent underlying states. We study the interaction of a lying cost, increasing in the distance from the message prescribed by the language, and a deception cost, increasing in the distortion induced in beliefs. Higher lying costs reduce bias and informativeness; higher deception costs do the opposite. Full revelation is sustained as lying costs become small, but with unbounded bias and communication costs. The most efficient policies sustaining nearly full revelation feature high deception costs with some tolerance for lying. With complementarities, targeting messages both untruthful and deceptive sustains full revelation without communication costs.

arXiv comment43 pages, including online appendix. Forthcoming in Journal of Political Economy Microeconomics