The economics of fraud and corruption

Abstract

Fraud and corruption are serious issues which undermine the provision of public goods. This thesis consists of three papers which analyze the economics of fraud and the mechanisms by which it can be detected and averted. An introductory chapter presents an overview of the economic ideas surrounding these topics. In the αrst paper, I analyze a US federal law that incentivizes whistleblowers to litigate against fraud and misreporting committed against the Medicare program. I provide a theoretical framework for understanding the economic tradeoffs associated with privatized whistleblowing enforcement and then empirically analyze the deterrence effects of whistleblower lawsuits. In the second paper, conducted as joint research, we consider the incentives for misreported enrollment statistics in Israeli public school data and the way in which data manipulation undermines economic estimates of the returns to smaller class sizes. We provide evidence of enrollment manipulation and show that smaller class sizes have no effect on student achievement, overturning earlier literature. In the third paper, we develop a mechanism for detecting misreported αnancial data and apply it to reports from a World Bank project. Our results are consistent with strategic and proαtable falsiαcation of data, and our method matches the results of an audit conducted independently by the World Bank on the same project.