Wednesday, March 30, 2011

Fraud cycles

The evolution of crime over time is much studied, and there is a lot of agreement that demographics are very important for many crime categories that are the "specialty" of young adults, like violent crimes. Fraud, however, cannot be tied to a particular age category, yet fraud statistics exhibit a remarkable cyclical pattern, a pattern that is not correlated across fraud categories or with the business cycle. What could give rise to such cycles?

Jiong Gong, Preston McAfee and Michael Williams come up with a theory that can rationalize these cycles. Once a lot of fraud cases make the news, people become more careful and new laws are put in place, which makes fraud more difficult. As fraud then disappears from the picture, people become less careful, and fraudsters find new and innovative ways to make money, and statistics show a comeback. That reminds me of privatization-nationalization cycles.

Of course, fraud statistics are not perfect. Indeed, they only measure fraud arrests, not fraud occurrence. One could argue that more people get arrested for fraud when victims are more vigilant, not less. That would be an entirely different story of fraud cycles.

No comments: