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Is Investment in Prevention Correlated with Insurance Fraud? Theory and Experiment

Author

Listed:
  • Feess Eberhard

    (8491 Victoria University of Wellington , Pipitea Campus, Lambton Quay, Wellington, New Zealand)

  • Nguyen Loan Cong To

    (8491 Victoria University of Wellington , Pipitea Campus, Lambton Quay, Wellington, New Zealand)

  • Noy Ilan

    (8491 Victoria University of Wellington , Pipitea Campus, Lambton Quay, Wellington, New Zealand)

Abstract

Policy holders who engage in loss inflation by reporting higher than actual losses are a significant challenge for the insurance market. Based on a behavioral game-theoretic model, we analyze in an online experiment whether prevention taken by policy holders can provide a signal on loss inflation. We argue that the willingness for loss inflation depends on lying costs, other-regarding preferences and moral licensing. We consider treatment groups where subjects themselves decide whether to invest in prevention and control groups where a random computer draw decides on investment. We thereby disentangle the impacts of the aforementioned factors. First, we find evidence that other regarding-preferences influence loss inflation. Second, the impact of moral licensing goes in the direction predicted by our model but is not statistically significant. Third, and aligned with our model, our data suggest that other-regarding preferences and moral licensing countervail each other. We find no impact of whether the experiment is framed neutrally or in an insurance context.

Suggested Citation

  • Feess Eberhard & Nguyen Loan Cong To & Noy Ilan, 2025. "Is Investment in Prevention Correlated with Insurance Fraud? Theory and Experiment," Review of Law & Economics, De Gruyter, vol. 21(2), pages 221-247.
    • Handle: RePEc:bpj:rlecon:v:21:y:2025:i:2:p:221-247:n:1003
    DOI: 10.1515/rle-2024-0025
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    References listed on IDEAS

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    JEL classification:

    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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