When Trust Attracts Fraud: AI and Trust Arbitrage

Trust can attract fraud when it delays verification. We develop a two-market signaling model in which generative AI lowers fabrication, verification, and targeting costs. When fabrication becomes profitable before verification, claim credibility first falls and later recovers. Across markets, higher prior quality can delay verification, creating an interval in which only the lower-quality market checks. If targeting becomes profitable in this interval, deceptive sellers enter the higher-quality but less vigilant market, and their entry can initially reverse its reliability advantage. The inflow also triggers verification and deters further entry. We call this self-limiting mechanism trust arbitrage. In the age of generative AI, trust can thus create an endogenous but temporary protection gap that redirects deception across markets.