A Note on the Incentive to Reveal Information

Abstract

There are many situations in which a party will obtain a reward or, more generally, will be treated in a way that is affected by information that he reveals, assuming that the information can be verified as true. This is ordinarily the case in goods markets; a seller (say, of a used automobile) will expect to receive a higher price if he can establish favorable facts to the buyer (for example, by showing records proving that the automobile has been regularly serviced) and to receive a lower price were he to reveal unfavorable facts. A related phenomenon occurs in insurance markets; a buyer (for example, of life insurance) will pay a lower premium if he can demonstrate (perhaps with medical records) that his risk is low. Similarly, the evidence that a person (an accident victim; a criminal defendant) substantiates before a court will influence the legal outcome ( a money judgment for the accident victim; a criminal sanction for the defendant); the demonstrable reasons that a person offers for his actions (breaking a lunch engagement) in normal social intercourse will affect the attitude of others toward him. The variety of situations in which the verifiable information that a party conveys will matter to his treatment is plainly large. Such situations will be examined here in a model in which the following assumptions are made. First, some parties possess verifiable information - they can prove that the information is valid - while other parties do not. (Some sellers of automobiles have service records and others do not; some purchasers of life insurance have reasonably complete medical records, others do not; some criminal defendants can bring forward good alibi witnesses, others cannot.) Second, the reward (hereafter, most broadly interpreted) that a party receives if he reveals verifiable information is influenced by that information. Third, the reward that a party receives if he does not reveal verifiable information - either because he does not possess it or because he possesses it but chooses to keep silent - is determined by the characteristics of the entire group of parties who do not reveal verifiable information or by rational inferences that can be drawn about them.