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Credit and Identity Theft

  • Charles M. Kahn
  • William Roberds

    ()

    (Federal Reserve Bank of Atlanta)

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 “identity†and its use in credit transactions. In the environments we construct, various types of identity theft occur in equilibrium, including “new account fraud,†“existing account fraud,†and “friendly fraud.†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 “quasi-identities,†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 anyone’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 “friendly fraud†(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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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 34.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:34
Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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  1. Kocherlakota, Narayana R., 1998. "Money Is Memory," Journal of Economic Theory, Elsevier, vol. 81(2), pages 232-251, August.
  2. Charles M. Kahn & James McAndrews & William Roberds, 2000. "A theory of transactions privacy," Working Paper 2000-22, Federal Reserve Bank of Atlanta.
  3. S. Rao Aiyagari & Stephen D. Williamson, 1998. "Money and Dynamic Credit Arrangements with Private Information," Game Theory and Information 9802002, EconWPA.
  4. Townsend, Robert M, 1989. "Currency and Credit in a Private Information Economy," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1323-44, December.
  5. Edward J. Green & Warren E. Weber, 1996. "Will the new $100 bill decrease counterfeiting?," Working Papers 571, Federal Reserve Bank of Minneapolis.
  6. Antoine Martin & Michael Orlando & David Skeie, 2006. "Payment networks in a search model of money," Staff Reports 263, Federal Reserve Bank of New York.
  7. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
  8. Silva, Emilson C. D. & Kahn, Charles M., 1993. "Exclusion and moral hazard : The case of identical demand," Journal of Public Economics, Elsevier, vol. 52(2), pages 217-235, September.
  9. Kahn, Charles M. & Roberds, William, 2008. "Credit and identity theft," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 251-264, March.
  10. Taub, Bart, 1994. "Currency and Credit Are Equivalent Mechanisms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(4), pages 921-56, November.
  11. Monnet, Cyril, 2005. "Counterfeiting and inflation," Working Paper Series 0512, European Central Bank.
  12. Ping He & Lixin Huang & Randall Wright, 2005. "Money And Banking In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 637-670, 05.
  13. Klaus Kultti, 1996. "A monetary economy with counterfeiting," Journal of Economics, Springer, vol. 63(2), pages 175-186, June.
  14. Kocherlakota, Narayana & Wallace, Neil, 1998. "Incomplete Record-Keeping and Optimal Payment Arrangements," Journal of Economic Theory, Elsevier, vol. 81(2), pages 272-289, August.
  15. Nosal, Ed & Wallace, Neil, 2007. "A model of (the threat of) counterfeiting," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 994-1001, May.
  16. Charles M. Kahn & James McAndrews & William Roberds, 2004. "Money is privacy," Working Paper 2004-18, Federal Reserve Bank of Atlanta.
    • Charles M. Kahn & James McAndrews & William Roberds, 2005. "Money Is Privacy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 377-399, 05.
  17. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "A model of private bank-note issue," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 104-136, January.
  18. Lee McIntyre, 2000. "Making money keeps getting easier," Regional Review, Federal Reserve Bank of Boston, issue Q2, pages 18-24.
  19. Dean Corbae & Joseph Ritter, 2004. "Decentralized credit and monetary exchange without public record keeping," Economic Theory, Springer, vol. 24(4), pages 933-951, November.
  20. Peter Burns & Anne Stanley, 2002. "Fraud management in the credit card industry," Payment Cards Center Discussion Paper 02-05, Federal Reserve Bank of Philadelphia.
  21. Araujo, Luis, 2004. "Social norms and money," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 241-256, March.
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