Signaling, Self-Reporting, and Auditing(Online Seminar)
In many real-world settings, an action that affects the value of a product or service is self-reported rather than publicly observable. This, in turn introduces the possibility of misrepresentation. In this paper, we propose a theoretical model of self-reporting. A sender chooses an action and sends a message concerning the action to multiple receivers. Receivers then bid for the sender’s service after deciding whether to audit the sender or not. We find that misrepresentation and its driving factors may improve social welfare, if the action serves as a signal of a privately known desirable characteristic of the sender. This result stands in stark contrast to a scenario in which no signaling is involved. We fully describe the behavior of the sender and receivers in the unique separating equilibrium. Finally, we apply our approach to common real-world practices including resume padding, lying in the college admissions process, and odometer fraud.