The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd


  • Edi Karni
Reference work entry


An agent is said to have committed fraud when he misrepresents the information he has at his disposal so as to persuade another individual (principal) to choose a course of action he would not have chosen had he been properly informed. The essential element of this phenomenon is the presence of two individuals both of whom have something to gain from co-operating with each other but who have conflicting interests and differential information. More specifically, it is critical that the agent be both better informed than the principal and in a position to use his superior knowledge to affect the principal’s actions so as to increase his own share of the total benefit at the principal’s expense. As the choice of terminology indicates, fraud is a special case of a more general class of economic phenomena known as agency relationships. (For a more elaborate discussion and citations see Arrow 1985.)

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  1. Arrow, K.J. 1985. The economics of agency. In Principals and agents: The structure of business, ed. J.N. Pratt and R. Zeckhauser. Cambridge, MA: Harvard Business School Press.Google Scholar
  2. Darby, M.R., and E. Karni. 1973. Free competition and the optimal amount of fraud. Journal of Law and Economics 16(1): 67–88.CrossRefGoogle Scholar
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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Edi Karni
    • 1
  1. 1.