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Financial Fraud and Investor Awareness
We study a retail financial market with naive investors who are unaware of the possible financial fraud. In our model, firms strategically choose whether to offer normal or fraudulent products to possibly unaware investors. Having new firms in the market makes offering normal products less profitable and thus discourages firms from behaving honestly. In a leader-follower environment, an honest firm may sell a normal product to sophisticated investors, while a dishonest firm targets only naive investors.
2020-05-01