The quintessential crime of the information age is identity theft, the malicious use of personal identifying data. In this paper we model “identity” and its use in credit transactions. Various types of identity theft occur in equilibrium, including “new account fraud,” “existing account fraud,” and “friendly fraud.” The equilibrium incidence of identity theft represents a tradeoff between a desire to avoid costly or invasive monitoring of individuals on the one hand and the need to control transactions fraud on the other. Our results suggest that technological advances will not eliminate this tradeoff.
JEL classification: D830, E420, G280
Key words: identity theft, fraud, money, search
We thank participants in a seminar at the Bank of England for comments on an early draft. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.
Please address questions regarding content to William Roberds, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8970, firstname.lastname@example.org, or Charles M. Kahn, Department of Finance, University of Illinois, Urbana-Champaign, Champaign, Illinois 61820, email@example.com.
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