Good Lies

Abstract

Decision makers often face uncertainty both about the ability and the integrity of their advisors. If an expert is sufficiently concerned about establishing a reputation for being skilled and unbiased, she may truthfully report her private information about the decision-relevant state. However, while in a truthtelling equilibrium the decision maker learns only about the ability of the expert, in an equilibrium with some misreporting the decision maker also learns about the expert’s bias. Although truthful behavior allows for more informed current decisions, it may lead to worst sorting. Therefore, if a decision maker places enough weight on future choices relative to present ones, lying may be welfare improving.