Is Investment in Prevention Correlated with Insurance Fraud? Theory and Experiment

Feess Eberhard (), Nguyen Loan Cong To () and Noy Ilan ()
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Feess Eberhard: 8491 Victoria University of Wellington , Pipitea Campus, Lambton Quay, Wellington, New Zealand
Nguyen Loan Cong To: 8491 Victoria University of Wellington , Pipitea Campus, Lambton Quay, Wellington, New Zealand
Noy Ilan: 8491 Victoria University of Wellington , Pipitea Campus, Lambton Quay, Wellington, New Zealand

Review of Law & Economics, 2025, vol. 21, issue 2, 221-247

Abstract: Policy holders who engage in loss inflation by reporting higher than actual losses are a significant challenge for the insurance market. Based on a behavioral game-theoretic model, we analyze in an online experiment whether prevention taken by policy holders can provide a signal on loss inflation. We argue that the willingness for loss inflation depends on lying costs, other-regarding preferences and moral licensing. We consider treatment groups where subjects themselves decide whether to invest in prevention and control groups where a random computer draw decides on investment. We thereby disentangle the impacts of the aforementioned factors. First, we find evidence that other regarding-preferences influence loss inflation. Second, the impact of moral licensing goes in the direction predicted by our model but is not statistically significant. Third, and aligned with our model, our data suggest that other-regarding preferences and moral licensing countervail each other. We find no impact of whether the experiment is framed neutrally or in an insurance context.

Keywords: insurance fraud; precaution; experiment; misreporting; moral licensing (search for similar items in EconPapers)
JEL-codes: D9 G22 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1515/rle-2024-0025

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