A neuroeconomic theory of (dis) honesty

We develop a theory of dishonesty based on neurophysiological evidence that supports the idea of a two-step process in the decision to cheat. Formally, decisions can be processed vía a costless “honest” channel that generates truthful behavior or vía a costly “dishonest” channel that requires attentional resources to trade-off costs and benefits of cheating. In the first step, a decision between these two channels is made based on ex-ante information regarding the expected benefits of cheating. In the second step, decisions are based on the channel that has been selected and, when applicable, the realized benefit of cheating. The model makes novel predictions relative to existing behavioral theories. First, adding external complexity to the decision-making problem (e.g., in the form of multi-tasking) deprives the individual from attentional resources and consequently decreases the propensity to engage in dishonest behavior. Second, higher expectations about the benefits of cheating results in a higher frequency of trial-by-trial cheating for any realized benefit level. Third, multiplicity of equilibria (characterized by different levels of cheating) emerges naturally in the context of illegal markets, in which expected benefits are endogenous.