The cost of lying... and how incentives can keep us honest

When it comes to the world of work, economists usually base their theories on employees having no qualms about lying if it is in their own interests.

However, the reality is many people are often honest. This is partly due to the impact of lying - described as “lying costs” - such as people disliking lying, lying convincingly being hard to do, as well as the risk of being caught.

Professor Daniel Garrett, from the University of Essex, has been selected for a £1.4m European Research Council Consolidator Grant to research how best to design incentives for people who might lie but face lying costs. Such incentives can be important in many settings such as managerial pay, employee incentives, tax compliance and insurance claims.

Professor Garrett, from the Department of Economics, will lead a research team that will study new mathematical models of incentives, focusing on how incentives, lying costs and decisions to lie can change over time.

“So, for example, take the question of the financial incentives provided to a company’s senior management that can include things like stock and stock options. These incentives potentially affect what profits or performance the company management wants to assess in the annual reports,” explained Professor Garrett.  “While the incentives might influence how the senior management chooses to report, the management’s approach to financial reporting may become normalised over time, which means that past incentives also end up mattering for later behaviour.”

The idea here is that deceptive behaviour can become normalised over time, leading to a slippery slope. This is consistent with evidence suggesting that people who prefer to be honest can become more comfortable with lying as time passes and as they tell more lies.

“With this in mind, the types of incentives implemented early in a relationship may be key to future behaviour around lying,” added Professor Garrett.

The research findings are hoped to be of interest to those responsible for determining incentives – from employers setting worker bonuses and boards of directors determining managers’ pay to governments and tax authorities setting tax rules.

The five-year project will involve a small team of collaborators including Dr Aditya Kuvalekar, also from the Department of Economics.

Professor Garrett was among the 308 researchers selected for the Consolidator Grant out of 2,130 candidates. The grants will support scientific projects spanning all disciplines of research from engineering to life sciences to humanities.

President of the European Research Council Professor Maria Leptin said: “The new Consolidator Grant winners represent some of the best of European research.”