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Credit and Identity Theft

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  • Charles M. Kahn
  • William Roberds

    ()
    (Federal Reserve Bank of Atlanta)

Abstract

The quintessential crime of the information age is identity theft, the malicious use of personal identifying data. In this paper we provide a model of “identity†and its use in credit transactions. In the environments we construct, various types of identity theft occur in equilibrium, including “new account fraud,†“existing account fraud,†and “friendly fraud.†In the model, the equilibrium incidence of identity theft arises from a tradeoff between a desire to avoid costly or invasive monitoring of individuals on the one hand, and the need to control transactions fraud on the other. Our results suggest that technological advances will not eliminate this tradeoff. Section 2 of the paper makes use of the search-theoretic model developed in Kahn, McAndrews, and Roberds (2005). It illustrates how identity theft is a consequence of information-sharing among sellers, via instruments that amount to artificial “quasi-identities,†e.g., credit cards. While such information-sharing reduces the cost and equilibrium incidence of transactions fraud, it can also facilitate the propagation of fraud across different sellers, i.e., what is commonly known as identity theft. Nonetheless, as the costs of information sharing fall, such arrangements will generally dominate. Section 3 considers two offshoots of the basic model. In the first variation, money is introduced as a sort of card that is not tied to anyone’s identity. Under suitable conditions, the simultaneous use of money and credit can improve welfare relative to the use of credit alone. This occurs because money allows for transactions to occur where identity verification would be too costly. The second variation allows for the possibility of “friendly fraud†(fraudulently claiming fraud) and shows how information-sharing arrangements can be robust to this type of fraud risk. In sum, this paper illustrates how identity theft and related types of transactions fraud may be incorporated into modern theories of money and credit. Our methodology for investigating identity theft is a general one, whose application is not necessarily tied to any single approach.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 34.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:34

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Keywords: Identity theft; fraud; money; credit;

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References

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  1. Lee McIntyre, 2000. "Making money keeps getting easier," Regional Review, Federal Reserve Bank of Boston, issue Q2, pages 18-24.
  2. Antoine Martin & Michael Orlando & David Skeie, 2006. "Payments network in a search model of money," 2006 Meeting Papers 580, Society for Economic Dynamics.
  3. Ping He & Lixin Huang & Randall Wright, 2005. "Money And Banking In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 637-670, 05.
  4. Charles M. Kahn & William Roberds, 2006. "Credit and Identity Theft," 2006 Meeting Papers 34, Society for Economic Dynamics.
  5. Peter Burns & Anne Stanley, 2002. "Fraud management in the credit card industry," Payment Cards Center Discussion Paper 02-05, Federal Reserve Bank of Philadelphia.
  6. Charles M. Kahn & James McAndrews & William Roberds, 2000. "A theory of transactions privacy," Working Paper 2000-22, Federal Reserve Bank of Atlanta.
  7. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "A model of private bank-note issue," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 104-136, January.
  8. Narayana R. Kocherlakota, 1996. "Money is memory," Staff Report 218, Federal Reserve Bank of Minneapolis.
  9. Townsend, Robert M, 1989. "Currency and Credit in a Private Information Economy," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1323-44, December.
  10. Monnet, Cyril, 2005. "Counterfeiting and inflation," Working Paper Series 0512, European Central Bank.
  11. Klaus Kultti, 1996. "A monetary economy with counterfeiting," Journal of Economics, Springer, vol. 63(2), pages 175-186, June.
  12. S. Rao Aiyagari & Stephen D. Williamson, 1998. "Money and dynamic credit arrangements with private information," Working Paper 9807, Federal Reserve Bank of Cleveland.
  13. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
  14. Ed Nosal & Neil Wallace, 2004. "A model of (the threat of) counterfeiting," Working Paper 0401, Federal Reserve Bank of Cleveland.
  15. Araujo, Luis, 2004. "Social norms and money," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 241-256, March.
  16. Dean Corbae & Joseph Ritter, 2004. "Decentralized credit and monetary exchange without public record keeping," Economic Theory, Springer, vol. 24(4), pages 933-951, November.
  17. Edward J. Green & Warren E. Weber, 1996. "Will the new $100 bill decrease counterfeiting?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 3-10.
  18. Charles M. Kahn & James McAndrews & William Roberds, 2004. "Money is privacy," Working Paper 2004-18, Federal Reserve Bank of Atlanta.
    • Charles M. Kahn & James McAndrews & William Roberds, 2005. "Money Is Privacy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 377-399, 05.
  19. Kocherlakota, Narayana & Wallace, Neil, 1998. "Incomplete Record-Keeping and Optimal Payment Arrangements," Journal of Economic Theory, Elsevier, vol. 81(2), pages 272-289, August.
  20. Taub, Bart, 1994. "Currency and Credit Are Equivalent Mechanisms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(4), pages 921-56, November.
  21. Silva, Emilson C. D. & Kahn, Charles M., 1993. "Exclusion and moral hazard : The case of identical demand," Journal of Public Economics, Elsevier, vol. 52(2), pages 217-235, September.
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Citations

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Cited by:
  1. Kahn, Charles M. & Roberds, William, 2009. "Why pay? An introduction to payments economics," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 1-23, January.
  2. Antoine Martin & Michael Orlando & David Skeie, 2008. "Payment networks in a search model of money," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 104-132, January.
  3. Giannetti, Caterina & Jentzsch, Nicola, 2013. "Credit reporting, financial intermediation and identification systems: International evidence," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 60-80.
  4. Marianne Crowe & Scott Schuh & Joanna Stavins, 2006. "Consumer behavior and payment choice: a conference summary," Public Policy Discussion Paper 06-1, Federal Reserve Bank of Boston.
  5. Hartmann-Wendels, Thomas & Mählmann, Thomas & Versen, Tobias, 2009. "Determinants of banks' risk exposure to new account fraud - Evidence from Germany," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 347-357, February.
  6. He, Ping & Huang, Lixin & Wright, Randall, 2008. "Money, banking, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1013-1024, September.
  7. Charles M. Kahn & William Roberds, 2005. "Credit and identity theft," Conference Series ; [Proceedings], Federal Reserve Bank of Boston.
  8. Michele Braun & James McAndrews & William Roberds & Richard Sullivan, 2008. "Understanding risk management in emerging retail payments," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 137-159.
  9. Roberds, William & Schreft, Stacey L., 2009. "Data breaches and identity theft," Journal of Monetary Economics, Elsevier, vol. 56(7), pages 918-929, October.
  10. Monnet, Cyril & Roberds, William, 2008. "Optimal pricing of payment services," Journal of Monetary Economics, Elsevier, vol. 55(8), pages 1428-1440, November.
  11. Cyril Monnet & William Roberds, 2007. "Optimal pricing of payment services when cash is an alternative," Working Papers 07-26, Federal Reserve Bank of Philadelphia.
  12. Cyril Monnet & William Roberds, 2006. "Credit and the no-surcharge rule," Working Paper 2006-25, Federal Reserve Bank of Atlanta.
  13. Stacey L. Schreft, 2007. "Risks of identity theft: Can the market protect the payment system?," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 5-40.
  14. Caterina Giannetti & Nicola Jentzsch, 2011. "Credit Reporting, Access to Finance and Identification Systems: International Evidence," Jena Economic Research Papers 2011-031, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.

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