Massimo Scotti (University of Technology, Sydney) on "Good Lies"

Decision makers often face uncertainty both about the ability and the objectives of their advisors. If an advisor is sufficiently concerned about establishing a reputation for being skilled and unbiased, the advisor truthfully reports his private information about the decision-relevant state. However, we show that truthful revelation may not necessarily maximise the expected payoff of the decision maker. There is indeed a trade-off between the amount of information revealed about the decision-relevant state and what the decision maker learns about the advisor’s type. While in a truth-telling equilibrium the decision maker learns only about the ability of the advisor, in an equilibrium with some misreporting (which occurs when the reputational concerns of the advisors are not too high) the decision maker learns about both the ability and the objectives of the expert. In other words, while reputational concerns improve discipline and allow for truthful revelation, they nevertheless reduce sorting.  Therefore, if a decision maker places enough weight on future choices relative to present ones, equilibrium with some lying may be preferred to truth-telling.