Credit and Identity Theft
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 â€œidentityâ€ and its use in credit transactions. In the environments we construct, various types of identity theft occur in equilibrium, including â€œnew account fraud,â€ â€œexisting account fraud,â€ and â€œfriendly fraud.â€ 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 â€œquasi-identities,â€ 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 anyoneâ€™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 â€œfriendly fraudâ€ (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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