The Fog of Fraud – Mitigating Fraud by Strategic Ambiguity

34 Pages Posted: 29 May 2010 Last revised: 11 Dec 2013

See all articles by Matthias Lang

Matthias Lang

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics; Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods; CESifo (Center for Economic Studies and Ifo Institute)

Achim Wambach

ZEW – Leibniz Centre for European Economic Research; University of Mannheim; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: June 1, 2012

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, like tax enforcement.

Keywords: Fraud, Commitment, Ambiguity, Costly State Verification, Insurance, Audit

JEL Classification: D8, K4

Suggested Citation

Lang, Matthias and Wambach, Achim, The Fog of Fraud – Mitigating Fraud by Strategic Ambiguity (June 1, 2012). Games and Economic Behavior, Vol. 81, No. C, 2013; MPI Collective Goods Preprint No. 2010/24. Available at SSRN: https://ssrn.com/abstract=1617199 or http://dx.doi.org/10.2139/ssrn.1617199

Matthias Lang (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
Bonn
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Achim Wambach

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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