CeDEx Seminar - Daniel Martin (Northwestern Kellogg School of Management)

Complex Disclosure

joint work with Ginger Jin (University of Maryland) and Michael Luca (Harvard Business School) 

Abstract:

We implement experimentally a simple game of mandatory disclosure in which senders are required to disclose their private information truthfully, but can choose how complex to make their reports. If senders choose complex reports, receivers must exert costly cognitive effort to correctly determine the sender’s private information. We find that senders use complex disclosure when their private information would lead receivers to act against their interests. This obfuscation is sustained by two types of mistakes that receivers make when they face complexity. First, receivers who make quick decisions act in accordance with their beliefs, but these beliefs are often incorrect, which reflects naivete about sender strategies. Second, receivers who make considered decisions do not act in accordance with their skeptical beliefs. Instead they appear to ignore their beliefs entirely, consistent with base rate neglect.