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Private GovernanceCreating Order in Economic and Social Life$
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Edward Peter Stringham

Print publication date: 2015

Print ISBN-13: 9780199365166

Published to Oxford Scholarship Online: August 2015

DOI: 10.1093/acprof:oso/9780199365166.001.0001

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How Technologically Advanced Markets Can Work Even When Fraud Is “Legal”

How Technologically Advanced Markets Can Work Even When Fraud Is “Legal”

Ex Ante Risk Management by PayPal and Other Intermediaries

Chapter:
(p.100) chapter 7 How Technologically Advanced Markets Can Work Even When Fraud Is “Legal”
Source:
Private Governance
Author(s):

Edward Peter Stringham

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199365166.003.0007

One way to address fraud is to deal with it after it occurs, but government is often powerless to identify perpetrators and recoup losses for victims. With modern electronic commerce, market participants are exposed to fraudsters from around the world, and most of the time, laws against fraud have little power against these criminals. Payment processors like PayPal, however, saw such problems and solved them with a fraud-detection program that relied on artificial intelligence to prevent fraudulent transactions from taking place. Paid to assume and manage risk, the payment processor transformed what others would consider a legal problem into a risk-management problem. The better financial intermediaries are at preventing problems ex ante, the less relevant it is that government is unable to solve problems ex post.

Keywords:   cyberfraud, fraud management, financial intermediary, credit card company, PayPal

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