Tell me lies, tell me Pareto white lies

Markets are supposed to work well under certain assumptions, one of those being the availability of information. Information allows buyers and sellers to find each other, and to make decisions over whether to trade or not.

So lack of information is often used as an example of something that stops markets working properly, and providing more information is often seen as a bit of a cure-all. It’s why Governments and regulators are quite keen on it – providing information on healthy eating to help people make healthier choices, publishing school league tables to help parents choose the right school or the best hospital for their needs.

It’s quite easy to fall into the trap of thinking that providing more information always makes markets work better. But it isn’t always the case: in some cases, vague information or actual misinformation leads to a better outcome from society’s point of view.

Take, for example, the beginnings of a bank run. If the bank’s customers are made aware that other customers are withdrawing their money, it becomes in their interests to withdraw their deposits too: it’s better to get your money out before the bank collapses. However, this results in an escalation of the crisis – as more and more people withdraw their money, the bank does indeed collapse.

But white lies are a bit of an ethically grey area. (And telling someone that you had to lie to them for their own good is a bit patronising). “Hiding an inconvenient truth: lies and vagueness” by researchers at Tilburg University looks at whether people are able to tell white lies, or as they call them, Pareto white lies, for the good of society (Pareto is economic jargon for the outcome that maximizes welfare from society’s point of view).

The paper describes an experiment where people must choose how much to contribute to a good that benefits themselves as well as others. From each individual’s point of view, it’s better to free-ride on other people’s contributions, with the risk that contributions turn out to be insufficient, unless the good is especially valuable. Certain individuals – the “leaders” are given extra information on how valuable the good is in advance of contributions being collected, and can lie to other participants to encourage them to contribute.

The “leaders” turn out to be quite good at doing this – lying to other participants when it’s clear that  it would be in the group interest for the good to be provided but there’s a danger that the participants may try to free-ride.

The interesting result is when the leaders are given a chance to be vague rather than tell outright lies. The leaders are pretty bad at using vague langauge – only being vague when they’re hiding an “inconvenient” truth, but being precise when it’s a “convenient” one. Surprisingly, followers don’t learn to deduce what’s going on when leaders are being vague – so that vague messages are just as good as telling white lies.

Which is a relief, because it’s harder to be convicted of being vague than of telling outright lies…

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2 Responses to Tell me lies, tell me Pareto white lies

  1. Pingback: Perfection in Imperfect Information « View from the Cubicle Farm

  2. Pingback: 2010 in review | Five Minute Economist's Blog

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