Explain the assumptions of human behavior regarding the three different arguments in the literature on the possible effects of competition on the level of misreporting of divisional managers toward headquarters. Why may some of the assumptions not hold in a setting with multiple periods and investment “rounds”?
One stream of research argues that there is overstatement to the maximum possible extent as soon as “some” level of competition exists in order to warrant chances of funding. Here, individuals bear no private costs or disutility of lying or acting unethically. Another stream of literature suggests that individuals tend to trade off the potential benefits of overstating predicted performance of their investment projects and the disutility from misreporting. This trade-off leads to more misreporting under medium levels of competition, but less misreporting under high levels of competition, because here individuals need to overstate too much to warrant chances of funding so that the disutility from lying is too high relative to the potential benefits from receiving funding. A third stream of literature argues that a linear relationship exists between the level of competition and the level of misreporting because individuals feel that the level of competition justifies the level of misreporting.