Deception and Reception: The Behavior of Information Providers and Users. By Roman Sheremeta & Timothy Shields
Journal of Economic Behavior & Organization, May 2017, Pages 445–456
http://www.sciencedirect.com/science/article/pii/S0167268117300823

Highlights
•    We find significant proportions of both deceptive and non-deceptive information providers.
•    Users glean information from providers’ reports.
•    Users are overly optimistic of providers’ honesty.
•    Subjects who are deceptive providers and receptive users earn the highest payoffs.

Abstract: We investigate the behavior of information providers (underwriters) and users (investors) in a controlled laboratory experiment where underwriters have incentives to deceive and investors have incentives to avoid deception. Participants play simultaneously as underwriters and investors in one-shot information transmission games. The results of our experiment show a significant proportion of both deceptive and non-deceptive underwriters. Despite the presence of deceptive underwriters, investors are receptive to underwriters’ reports, gleaning information content, albeit overly optimistic. Within our sample, deception by underwriters and reception by investors are the most profitable strategies. Moreover, participants who send deceptive reports to investors, but at the same time are receptive to reports of underwriters, earn the highest payoffs. These results call into question the characterization of duped investors being irrational.