Make It 'Til You Fake It

72 Pages Posted: 11 Mar 2020

See all articles by Raphael Boleslavsky

Raphael Boleslavsky

University of Miami - School of Business Administration - Department of Economics

Curtis R. Taylor

Duke University - Department of Economics

Date Written: February 17, 2020

Abstract

We study a dynamic model of fraud and trust-building featuring two parties: a principal, who has limited power of commitment and who wishes to accept real projects and reject fake ones, and an agent, who is either an ethical type that produces only a real project, or a strategic type that produces a real project but can also choose to generate a fake. Producing a real project takes a positive and uncertain amount of time, while a fake project can be manufactured instantaneously at some cost. In the unique equilibrium, the strategic agent randomizes the timing of fraud and the principal randomizes between acceptance and rejection. As time passes without a submission, the principal's belief that the agent is ethical grows until the point when she fully trusts the agent and accepts any subsequent submission with certainty. We explore several institutional remedies designed to improve the principal's welfare. These include: an imperfect auditing technology, opaque standards, commitment to suppress fraud, and requiring submissions to occur on a specified date.

Keywords: audit, counterfeit, deception, fraud, innovation, opaque standards, research, trust

JEL Classification: C73, D21, D82, L15, M42

Suggested Citation

Boleslavsky, Raphael and Taylor, Curtis R., Make It 'Til You Fake It (February 17, 2020). Economic Research Initiatives at Duke (ERID) Working Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=3540446 or http://dx.doi.org/10.2139/ssrn.3540446

Raphael Boleslavsky (Contact Author)

University of Miami - School of Business Administration - Department of Economics ( email )

P.O. Box 248126
Coral Gables, FL 33124-6550
United States

Curtis R. Taylor

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States
919-660-1827 (Phone)
919-684-8974 (Fax)

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