Punishment Motives for Small and Big Lies

• DOI: http://doi.org/10.1111/jems.12197
• Author: Gerald Eisenkopf,Verena Utikal,Ruslan Gurtoviy
• Date: 01 June 2017
• Published date: 01 June 2017

Punishment Motives for Small and Big Lies

GERALD EISENKOPF

Department I

University of Vechta

49377 Vechta, Germany

gerald.eisenkopf@uni-vechta.de

RUSLAN GURTOVIY

Department of Business Administration

University of Trier

54296 Trier,Germany

rgutovoy@yahoo.com

VERENA UTIKAL

Department of Economics

University of Erlangen-N¨

urnberg

90403 N¨

urnberg, Germany

verena.utikal@fau.de

Corporate fraud typically involves deceptive financial statements that are harmful for some

stakeholders. We analyze how preferencesfor honesty and economic fairness shape the punishment

of such untruthful statements. Our laboratory experiment disentangles the crucial confound that,

for deceptive financial statements, larger deviations from the truth imply both a stronger violation

of the honesty norm and an increase in economic harm. Our study measures how people punish

increased dishonesty controlling for the corresponding economic harm. We find that punishment

increases with the size of the lie. This behavioral pattern is driven by people who are honest

themselves. Our results suggest that popular demand for punitive measures in case of financial

scandals reflects a genuine interest in the enforcement of social norms.

1. Introduction

Many business relations rely on trust. This feature generates an incentive to deceive

your business partner. Deliberate untruthful accounting practices (as in the case of

Enron), deceptive emission statements (as in the case of Volkswagen), or the dishonest

transmission of interest rates (as in the LIBOR scandal) can increase the appropriator’s

profits. Even in everyday interactions, we observe salesmen overstating the quality of

their product, workers exaggerating their effort, and financial advisors hiding the risks

in an investment. In response most contracts within and between firms rely on (the threat

of) sanctions to deter such deception. However, such contracts are incomplete and do

not cover all possible kinds of dishonesty. Offended parties might punish behavior in

Weare grateful to Urs Fischbacher, Daniel M ¨

uhlhaus, Dieter Sadowski, and the research group at the Thurgau

Institute of Economics for their intellectual and administrative support in this project, in particular regarding

the access to the Lakelab. We acknowledge the financial support of the University of Trier (Forschungsfonds

2010). We also thank two anonymous referees and seminar participants in Konstanz and Trier for their

stimulating and helpful comments. All errors remain our own.

Note: One of our working papers contains an early version of an unpublished paper that uses the same data.

C2017 Wiley Periodicals, Inc.

Journal of Economics & Management Strategy, Volume26, Number 2, Summer 2017, 484–498