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The fog of fraud – mitigating fraud by strategic ambiguity

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  • Matthias Lang

    () (Max Planck Institute for Research on Collective Goods, Bonn)

  • Achim Wambach

    () (University of Cologne)

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, as the credible announcement of thoroughly auditing claim reports might act as a powerful deterrent. 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. Thus strategic ambiguity can be an equilibrium outcome in the market and competition does not force firms to provide the relevant information. This finding is also relevant in other auditing settings and complements the literature on games with ambiguity-averse players.

Suggested Citation

  • Matthias Lang & Achim Wambach, 2010. "The fog of fraud – mitigating fraud by strategic ambiguity," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2010_24, Max Planck Institute for Research on Collective Goods.
  • Handle: RePEc:mpg:wpaper:2010_24
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    Cited by:

    1. Riedel, Frank & Sass, Linda, 2016. "The strategic use of ambiguity," Center for Mathematical Economics Working Papers 452, Center for Mathematical Economics, Bielefeld University.
    2. Riedel, Frank, 2017. "Uncertain acts in games," Center for Mathematical Economics Working Papers 571, Center for Mathematical Economics, Bielefeld University.
    3. Lang, Matthias, 2017. "Legal uncertainty as a welfare enhancing screen," European Economic Review, Elsevier, vol. 91(C), pages 274-289.
    4. Yoshio Kamijo & Takehito Masuda & Hiroshi Uemura, 2015. "Who is audited? Experimental study on rule-based and human tax auditing schemes," Working Papers SDES-2015-9, Kochi University of Technology, School of Economics and Management, revised Jan 2015.
    5. repec:bpj:bejtec:v:18:y:2018:i:1:p:12:n:2 is not listed on IDEAS
    6. Alfredo Di Tillio & Nenad Kos & Matthias Messner, 2012. "The Design of Ambiguous Mechanisms," Working Papers 446, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    7. repec:spr:homoec:v:34:y:2017:i:4:d:10.1007_s41412-017-0061-4 is not listed on IDEAS
    8. Martin Pollrich, 2017. "Mediated audits," RAND Journal of Economics, RAND Corporation, vol. 48(1), pages 44-68, March.
    9. 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.

    More about this item

    Keywords

    commitment; Ambiguity; Fraud; Strategic Uncertainty; Costly State Verification;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior

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