Collusion in Vertical Relationships: The Case of Insurance Fraud in Taiwan

The delegation of services from producers to retailers is frequently at the origin of transaction costs, associated with the discretion in the way retailers do their job. This is particularly the case when retailers and customers collude to exploit loopholes in the contracts between producers and customers. In this paper, we analyze how insurance distribution channels may affect such misbehaviors, when car repairers are joining policy holders to defraud insurers. We focus attention on the Taiwan automobile insurance market by using a database provided by the largest Taiwanese automobile insurer. The theoretical underpinning of our analysisis provided by a model of claims fraud with collusion and audit. Our econometric analysis con firms that fraud occurs through the postponing of claims to the end of the policy year, possibly by filing on single claim for several events. It highlights the role of car dealer owned insurance agents in the collusive fraud mechanism.