The social welfare cost of fraud: Insights from an agent-based model

This paper is the first, to our knowledge, to investigate the cost of financial reporting fraud to the real economy by considering how misinformation about competitors’ profits might lead a firm to make misguided decisions when it updates its strategy each period. We use an agent-based model to show that misinformation might significantly slow and/or inhibit firms’ ability to learn about consumer preferences and, in some higher fraud level cases, may actually cause firms’ production decisions to diverge from consumer preferences over time.