Ulric B. and Evelyn L. Bray Social Sciences Seminar

Abstract: We use laboratory experiments to examine strategic disclosure and deception in a sender–receiver game modeling the data economy. Firms (senders) are privately informed of their quality and decide how to disclose it to consumers (receivers). They may signal higher quality through exaggeration, but face penalties if misrepresentation is detected. First, we vary the penalty for exaggeration and find that exaggeration declines with stronger penalties. We then compare two verification regimes: exogenous detection, which mimics probabilistic data breaches, and endogenous detection, in which receivers incur a cost to verify the firm's claim, mimicking privacy audits. Contrary to equilibrium predictions, exaggeration is more prevalent under exogenous detection than under endogenous detection. This is driven by the finding that some receivers function as watchdogs and have strong desire to detect regardless of detection cost.

Joint work with James Cooper (George Mason University) and Marty Chen (U of Maryland).