Truth, trust, and sanctions: On institutional selection in sender-receiver games

We have conducted a laboratory experiment to investigate the impact of institutions and institutional choice on truth-telling and trust in senderreceiver games. We find that in an institution with sanctioning opportunities, receivers sanction predominantly after having trusted lies. Individuals who sanction are responsible for truth-telling beyond standard equilibrium predictions, and they are more likely to choose the sanctioning institution. Sanctioning and non-sanctioning institutions coexist if their choice is endogenous, and the former shows a higher level of truth-telling but lower material payoffs. Our experimental findings are consistent with logit agent quantal response equilibrium with two distinct groups of individuals: one consisting of subjects who experience non-monetary lying costs as senders and non-monetary costs when being lied to as receivers, and the other consisting of payoff maximizers.