How effective are the administrative screening processes in preventing fraud in large-scale economic programs? originally appeared on Quora: the place to gain and share knowledge, empowering people to learn from others and better understand the world.
Answer by Shan Aman-Rana, Assistant Professor at University of Virginia, on Quora:
In the large-scale economic programs, fraudsters often lurk looking to exploit loopholes. My research along with Daniel Gingerich and Sandip Sukhtankar shows that the program administrators can minimize fraud with administrative screening processes. The question remains; how effective these screening processes really are?
In our paper “Screen Now, Save Later? The Trade-Off between Administrative Ordeals and Fraud”, we delved deep into this question, taking the Paycheck Protection Program (PPP) — one of the largest economic relief programs in US history — as our research playground.
The PPP was a behemoth; an $814-billion stimulus package released into the wild during the COVID-19 pandemic. It offered a lifeline to businesses on the brink, but it also attracted some less-than-honest applications. To deter these, administrative screening requirements were imposed; a kind of ‘gatekeeping’ to weed out the fraudulent from the genuine. We found that these screening measures, far from being mere bureaucratic hurdles, actually played a significant role in reducing fraud. By analyzing a database of nearly 11.5 million PPP loans and tracking changes in documentation standards applied to loan applications, we discovered that screening significantly curbed the incidence and magnitude of loan irregularities indicative of fraud.
One of the most insightful takeaways of our research is that the administrative screening weeded out people with past irregularities. Borrowers with a history of irregularities had strategically reduced their loan application amounts to sidestep screening, while those with a clean record didn’t resort to such tactics. This difference in behavior implies that the screening process managed to deter potential fraudsters without placing an undue burden on legitimate businesses.
Our estimates show that these screening measures led to a reduction in losses due to fraud of at least $744 million. A significant chunk of change was saved, validating the effectiveness of administrative screening processes in large-scale economic programs. So, the next time you hear about administrative ordeals, remember: they might be more than mere bureaucratic red tape. They might just be the unsung heroes in the fight against fraud.
Here is a key chart from our research paper that shows loan amount densities before and after the screening requirements were placed i.e. phase 2 started.
As phase 2 rolled out with its heightened screening measures, there was a noticeable shift in the density of loan applications. We observed a distinct spike in applications just below the threshold that would trigger the more stringent screening process. This wasn’t a random anomaly, but a strategic move by certain borrowers to avoid the increased scrutiny.
The pattern provides compelling visual evidence of the ‘sidestepping’ behavior we discussed earlier. It’s a testament to the impact of screening measures, showing how they influenced behaviors and deterred potential fraudsters from asking for larger loan amounts.
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