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The fog of fraud – Mitigating fraud by strategic ambiguity

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  • Lang, Matthias
  • Wambach, Achim

Abstract

Most insurance companies publish few data on the occurrence and detection of insurance fraud. This stands in contrast to the previous literature on costly state verification, which has shown that it is optimal to commit to an auditing strategy. The credible announcement of thoroughly auditing claim reports is a powerful deterrent. Yet, we show that uncertainty about fraud detection can be an effective strategy to deter ambiguity-averse agents from reporting false insurance claims. If, in addition, the auditing costs of the insurers are heterogeneous, it can be optimal not to commit, because committing to a fraud-detection strategy eliminates the ambiguity about auditing. Thus, strategic ambiguity can be an equilibrium outcome in the market. Even competition does not force firms to provide the relevant information. This finding is also relevant in other auditing settings, like tax enforcement.

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Bibliographic Info

Article provided by Elsevier in its journal Games and Economic Behavior.

Volume (Year): 81 (2013)
Issue (Month): C ()
Pages: 255-275

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Handle: RePEc:eee:gamebe:v:81:y:2013:i:c:p:255-275

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Web page: http://www.elsevier.com/locate/inca/622836

Related research

Keywords: Fraud; Commitment; Ambiguity; Costly state verification; Insurance; Audit;

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References

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Cited by:
  1. Shyam Sunder, 2011. "Paradox of Writing Clear Rules: Interplay of Financial Reporting Standards and Engineering," The Japanese Accounting Review, Research Institute for Economics & Business Administration, Kobe University, vol. 1, pages 119-130, December.
  2. Frank Riedel & Linda Sass, 2011. "The Strategic Use of Ambiguity," Working Papers 452, Bielefeld University, Center for Mathematical Economics.

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