N°16-45: When and why do ripple effects of dishonesty occur?

Although firms devote a great deal of resources to promoting high ethical standards, little is known about how deceptive information transmission affects behavior in these environments. We find evidence for ripple effects of deceptive reporting—that victims of lies pay lies forward—and show that they are more likely when people expect honesty. These results are consistent with a model of reference-dependent utility in which reference-dependence varies between and within individuals. We quantify the degree to which beliefs and emotions affect lying costs, and demonstrate that positive beliefs about others’ behavior have unintended consequences when ethical expectations are not met.