Fraud, Corruption and Institutions

Paper Session

Saturday, Jan. 7, 2017 10:15 AM – 12:15 PM

Swissotel Chicago, Zurich E
Hosted By: American Economic Association
  • Chair: Luigi Zingales, University of Chicago

Financial Intermediaries and Customer Complaints of David Reeb

Jiang Cheng
,
Shanghai University of Finance and Economics
Wenlan Qian
,
National University of Singapore
David M. Reeb
,
National University of Singapore

Abstract

We investigate the role of intermediary ownership form in providing reliable financial services to consumers. Exploiting a novel dataset of the universe of consumer complaints to state regulators, we find significant differences between stock and mutual insurers in the number of complaints made about them. Consumer complaints stem from concerns over reduced claim settlements, delayed payments, customer care, and misconduct (e.g. redlining and fraud). Following natural disasters, consumer complaints about insurers, especially stock insurers, exhibit a significant upward spike in both the state affected by the disaster and the unaffected states. Contrary to our expectations, competition among insurers appears to intensify the relatively high number of consumer complaints about stock intermediaries. We also discover evidence to suggest that consumers in states with strong regulatory oversight of intermediary solvency experience less reliable service from stock insurers. Finally, we observe that within-state increases in the stock-mutual complaint wedge are followed by substantial increases in personal bankruptcies. Overall, our analysis indicates that intermediary organizational structure is an important component of consumer financial protection.

Fraudulent Income Overstatement on Mortgage Applications During the Credit Expansion of 2002-2005

Atif Mian
,
Princeton University
Amir Sufi
,
University of Chicago

Abstract

Academic research, government inquiries, and press accounts show extensive mortgage fraud during the housing boom of the mid-2000s. We explore a particular type of mortgage fraud: the overstatement of income on mortgage applications. We define “income overstatement” in a zip code as the growth in income reported on home-purchase mortgage applications minus the average IRS-reported income growth from 2002 to 2005. Income overstatement is highest in low credit score, low income zip codes that Mian and Sufi (2009) show experience the strongest mortgage credit growth from 2002 to 2005. These same zip codes with high income overstatement are plagued with mortgage fraud according to independent measures. Income overstatement in a zip code is associated with poor performance during the mortgage credit boom, and terrible economic and financial economic outcomes after the boom including high default rates, negative income growth, and increased poverty and unemployment. From 1991 to 2007, the zip code-level correlation between IRS-reported income growth and growth in income reported on mortgage applications is always positive with one exception: the correlation goes to zero in the non-GSE market during the 2002 to 2005 period. Income reported on mortgage applications should not be used as true income in low credit score zip codes from 2002 to 2005.

Estimating the Unofficial Income of Officials From Housing Purchases: The Case of China

Deng Yongheng
,
National University of Singapore
Shang-Jin Wei
,
Columbia University
Jing Wu
,
Tsinghua University

Abstract

In countries with pervasive corruption, government officials take bribes. Estimating the size of the unofficial income by anti-corruption agencies or scholars (beyond one’s legal government salary) is difficult since bribes are largely unobserved except in the occasional media reports of already exposed and possibly extreme cases of corruption. We propose a way to systematically estimate the unofficial income based on house purchase information under the assumption that if an official has unofficial income, he or she is likely to own a more expensive house than some non-official with a comparable salary. We apply this idea to China. We use a detailed data set on house purchases in a large city and the associated personal characteristics of the purchasers. We infer that the amount of unofficial income for an average government official in the data set to be 60.0% of his or her official permanent income. More interestingly, we find that the unofficial income (as % of government salary) increases with the rank of the officials and the relative importance of government agencies. We discuss reasons for why our estimates may be a lower bound. We also find evidence that real estate companies offer discounts to government officials when they purchase a house. The unofficial income would be even bigger when taking into account the housing discount.

The Relevance of Broker Networks for Information Diffusion in the Stock Market

Marco Di Maggio
,
Harvard Business School
Francesco A. Franzoni
,
University of Lugano and Swiss Finance Institute
Amir Kermani
,
University of California-Berkeley
Carlo Sommavilla
,
University of Italy-Switzerland

Abstract

This paper shows that the network of relationships between brokers and institutional investors shapes the information diffusion in the stock market. We exploit trade-level data to show that trades channeled through central brokers earn significantly positive abnormal returns. This result is not due to differences in the investors that trade through central brokers or to stocks characteristics, as we control for this heterogeneity; nor is it the result of better trading execution. We find that a key driver of these excess returns is the information that central brokers gather by executing informed trades, which is then leaked to their best clients. We show that after large informed trades, a significantly higher volume of other investors execute similar trades through the same central broker, allowing them to capture higher returns in the first few days after the initial trade. The best clients of the broker executing the informed trade, and the asset managers affiliated with the broker, are among the first to benefit from the information about order flow. This evidence also suggests that an important source of alpha for fund managers is the access to better connections rather than superior skill.
Discussant(s)
Amir Kermani
,
University of California-Berkeley
Itzhak Ben-David
,
Ohio State University
Margarita Tsoutsoura
,
University of Chicago
Elvira Sojli
,
University of New South Wales
JEL Classifications
  • G2 - Financial Institutions and Services
  • K4 - Legal Procedure, the Legal System, and Illegal Behavior