INCENTIVES FOR DISHONESTY: AN EXPERIMENTAL STUDY WITH INTERNAL AUDITORS

We conduct an experiment with professional internal auditors and evaluate their performance and objectivity, measured as the extent to which they truthfully report the performance of other participants in a real-effort task. In line with our hypotheses, we find that incentive-based compensation increases dishonest behavior: competitive incentives lead to under-reporting of other participants' performance, while collective incentives lead to over-reporting of performance. We replicate these results with a student sample. In addition, we find that moving from an environment with objective performance evaluation toward a peer evaluation scheme reduces performance among internal auditors, but not among students.(JEL C93, M42, M52)