Do Liars Believe? Beliefs and Other-Regarding Preferences in Sender-Receiver Games

We examine subjects' behavior in sender-receiver games where there are gains from trade and alignment of interests in one of the two states. We elicit subjects' beliefs, risk and other-regarding preferences. Our design also allows us to examine the behavior of subjects in both roles, to determine whether the behavior in one role is the best response to the subject's own behavior in the other role. The results of the experiment indicate that 60 percent of senders adopt deceptive strategies by sending favorable message when the true state of the nature is unfavorable. Nevertheless, 67 percent of receivers invest conditional upon a favorable message. The investing behavior of receivers cannot be explained by risk preferences or as a best response to subject's own behavior in the sender's role. However, it can be rationalized by accounting for elicited beliefs and other-regarding preferences. Finally, the honest behavior of some senders can be explained by other-regarding preferences. Thus we find liars do believe, and individuals who care about the payoffs of others tend to be honest.