Reputation Effects in Repeated Audits, with Application to Insurance Fraud Deterrence
Reda Aboutajdine and
Pierre Picard
Working Papers from HAL
Abstract:
In principal-agent problems, the repetition of interactions in a dynamic setting may alter the equilibrium outcomes. In insurance fraud, the frequency of auditor-auditee interactions is higher when there is collusion between policyholders and service providers (e.g., car repairers, health care providers...). The same service provider usually handles claims filed by many policyholders affiliated to the same insurer, and thus the insurer-service provider interactions are repeated with reputation effects. We analyze this issue in a repeated game where the insurer may potentially face a dishonest service provider who colludes with policyholders. The insurer has beliefs about the type (honest or dishonest) of the service provider and she may verify the truthfulness of the claim through costly audits. The reputation of the service provider corresponds to these beliefs and changes over time, and misbehaving deteriorates this reputation. In the end, it may lead to a breach of contract and thus represents a threat that may deter from defrauding. We show that, at early periods, the insurer audits agents who would not be monitored in a static setting because their reputation is good enough. Corresponding dishonest agents who slipped under the radar and have an initially good reputation do not defraud systematically at early periods, as opposed to the instantaneous game. In addition, auditing efforts for medium reputations are lower as dishonest agents want to preserve the possibility of defrauding later. Both aspects corresponds to a reputation-based deterrence mechanism, where the fear of deteriorating one's reputation acts as a discipline device for dishonest service providers.
Keywords: Insurance fraud; Optimal auditing; Reputation; Learning; Deterrence (search for similar items in EconPapers)
Date: 2019-11-20
New Economics Papers: this item is included in nep-acc, nep-gth, nep-ias, nep-law and nep-mic
Note: View the original document on HAL open archive server: https://hal.science/hal-02373206
References: View references in EconPapers View complete reference list from CitEc
Citations:
Downloads: (external link)
https://hal.science/hal-02373206/document (application/pdf)
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-02373206
Access Statistics for this paper
More papers in Working Papers from HAL
Bibliographic data for series maintained by CCSD ().