Signal honesty may be compromised when heightened competition provides incentive for signal exaggeration. Some degree of honesty might be maintained by intrinsic handicap costs on signalling or through imposition of extrinsic costs, such as social punishment of low quality cheaters. Thus, theory predicts a delicate balance between signal enhancement and signal reliability that varies with degree of social competition, handicap cost, and social cost. We investigated whether male sexual signals of the electric fish Brachyhypopomus gauderio would become less reliable predictors of body length when competition provides incentives for males to boost electric signal amplitude. As expected, social competition under natural field conditions and in controlled lab experiments drove males to enhance their signals. However, signal enhancement improved the reliability of the information conveyed by the signal, as revealed in the tightening of the relationship between signal amplitude and body length. Signal augmentation in male B. gauderio was independent of body length, and thus appeared not to be curtailed through punishment of low quality (small) individuals. Rather, all individuals boosted their signals under high competition, but those whose signals were farthest from the predicted value under low competition boosted signal amplitude the most. By elimination, intrinsic handicap cost of signal production, rather than extrinsic social cost, appears to be the basis for the unexpected reinforcement of electric signal honesty under social competition. Signal modulation may provide its greatest advantage to the signaller as a mechanism for handicap disposal under low competition rather than as a mechanism for exaggeration of quality under high competition.