1. John H. Evans III, R. Lynn Hannan, Ranjani Krishnan, and Donald V. Moser Presented by Irana Scott

2.  Reassess the empirical importance of preferences for honesty ◦ Baiman and Lewis’ (1989)  Preferences for honesty are too small to be important ◦ Results in this paper  More honesty than predicted by agency theory

3.  Provide evidence regarding the strengths/weaknesses of existing models ◦ Revelation principle  Firms get honest reporting if they pay enough for it ◦ Agency Models  Purely wealth maximizing ◦ Types Models  Purely Honest ◦ Results from this study  These theories cannot predict findings of this study  The firm did not pay anything for the honesty in these experiments

4.  Investigate factors that affect the extent of honest reporting ◦ Brickley et al. (1997)  Trade off model  Level of honesty will decline as the payoff to lying increases  Results of this study ◦ Little evidence is found of a trade-off  Reporting may depend on how the contract divides the surplus

5.  Provide evidence concerning how the extent of honesty affects firm profit ◦ Agency theory  Contract with a production function yields more profit than a contract with only a reporting feature  There is no value to adding a reporting feature to a contract that already incorporates the production feature ◦ Results of this study  Agreement that there is more profit with a production function, but the difference is smaller  Profit increases when the contract employees both features

6.  Three experiments ◦ 28 MBA students assume the role of division manager ◦ The manager reports cost to headquarters in the form of a budget request ◦ The manager may obtain excess resources by lying (overstating cost) ◦ Lies are not detected

7.  Trust contract ◦ The manager receives a base salary ◦ The more the manager lies, the more he earns ◦ Reduction of firm profit ◦ Cash payments were based on one period selected randomly ◦ They find a significant positive association between reports and actual costs  Subjects have a preference for honesty

8.  High payoff trust contract ◦ Identical to experiment 1 except the maximum that can be gained is increased from $66.67 to $333.33 ◦ Number of subjects reduced to 11 ◦ Subjects did not lie significantly more

9.  Modified trust contract ◦ Add a production hurdle to experiments 1 and 2  For cost reports greater than 5, the manager receives on his salary  They found a significant positive relation between reported costs and actual costs  Preferences for honesty affected the reports of subjects, even though they were less honest in this scenario  Subjects lie more to achieve a more favorable distribution of the total surplus

10.  They tested ◦ Communication and non-communication based contracts ◦ Dishonesty under increasing monetary rewards  Threshold effect  Little misrepresentation at the lowest level of monetary reward, but above that level, most subjects were willing to lie  Reward was relatively small with a range of $6.375 to $10.00

11.  Baiman and Lewis (1989) ◦ “Encouraged” subjects to use an expected value approach ◦ 58.3% of subjects lied ◦ 41.7% did not lie, which is close to Evans et al. (2001) ◦