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Lying to Speak the Truth: Selective Manipulation and Improved Information Transmission

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  • PAUL POVEL
  • GÜNTER STROBL

Abstract

We analyze a principal‐agent model in which an effort‐averse agent can manipulate a publicly observable performance report. The principal cannot observe the agent's cost of effort, her effort choice, and whether she manipulated the report. An optimal contract links compensation to the realized output and the (possibly manipulated) report. Manipulation can be beneficial to the principal because it can make the report more informative about the agent's effort choice, thereby reducing the agent's information rent. This is achieved through a contract that incentivizes the agent to selectively engage in manipulation based on her effort choice.

Suggested Citation

  • Paul Povel & Günter Strobl, 2024. "Lying to Speak the Truth: Selective Manipulation and Improved Information Transmission," Journal of Finance, American Finance Association, vol. 79(6), pages 4303-4352, December.
    • Handle: RePEc:bla:jfinan:v:79:y:2024:i:6:p:4303-4352
    DOI: 10.1111/jofi.13375
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