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The fog of fraud – mitigating fraud by strategic ambiguity

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Lang,  Matthias
Max Planck Institute for Research on Collective Goods, Max Planck Society;

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Citation

Lang, M., & Wambach, A. (2010). The fog of fraud – mitigating fraud by strategic ambiguity.


Cite as: http://hdl.handle.net/11858/00-001M-0000-0028-6EFE-8
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 veri cation, which has shown that it is optimal to commit to an auditing strategy. The credible announcement of thoroughly auditing claim reports is a powerful deterrent. Yet, we show that uncertainty about fraud detection can be an e ffective 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. Even competition does not force fi rms to provide the relevant information. This nding is also relevant in other auditing settings, like tax enforcement.