How to reward honesty?

Heikki Rantakari

Journal of Economic Behavior & Organization, 2023, vol. 207, issue C, 129-145

Abstract: An agent and a principal are engaged in an ongoing relationship, where the agent receives project opportunities of random value and is biased towards implementation. Each period, the principal elicits a (non-contractible) recommendation from the agent, compares it to a random outside option and decides whether to implement the project or not. The key distortions in the stationary decision rule used by the principal that will sustain honest reporting by the agent are (i) discrimination against best projects, so that sometimes very good projects are not implemented even if they would benefit the principal, (ii) general favoritism, where proposals other than the best are sometimes implemented even when they have negative value to the principal, and (iii) focused leniency towards average projects, where the bias towards implementation is larger for average projects than for bad or good projects. The first limits the agent’s incentives to exaggerate by decreasing the effectiveness of exaggeration, the second increases the overall value of the relationship to the agent while the last targets the projects for which the incentive to exaggerate is the largest to sustain truth-telling.

Keywords: Strategic communication; Repeated games; Project selection; Advocacy (search for similar items in EconPapers)
JEL-codes: D23 D83 L23 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:207:y:2023:i:c:p:129-145

DOI: 10.1016/j.jebo.2023.01.009

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