The competitive advantage of honesty |
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| Institution: | 1. University of Heidelberg, Department of Economics, Bergheimer Str.58, 69115 Heidelberg, Germany;2. Max Planck Institute for Research on Collective Goods, Kurt-Schumacher-Str.10, 53113 Bonn, Germany;3. The University of Sydney, School of Economics, Level 5, Social Sciences Building, NSW 2006 Australia;1. Instituto de Analisis Economico (CSIC) and Barcelona GSE, Spain;2. Department of Economics (AE1), CESifo, IZA, Netspar, and Maastricht University, P.O. Box 616, Maastricht 6200 MD, the Netherlands |
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| Abstract: | We study competitive markets where firms may lie to their workers to reduce costs. Consumers may benefit from firms’ dishonesty through lower market prices. Does firms’ (dis-)honesty affect consumers’ purchasing decisions? Our experiment shows that when honesty is fully transparent, it can provide a competitive advantage: Honest firms sell more and – despite higher costs – achieve higher profits. This finding is in line with our equilibrium predictions when allowing for dishonesty-averse consumers. By identifying circumstances in which consumers – although not the addressee of dishonesty – “punish” firms for their within-firm dishonesty, we contribute both to behavioral ethics and behavioral industrial organization. |
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| Keywords: | Social responsibility Lying Behavioral ethics Behavioral industrial organization |
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