Insurers have the reputation of being bad payers who nitpick whenever an opportunity arises. However, this nitpicking activity has a positive impact on their auditing strategy since auditing may prove profitable when claimsare not fraudulent. We show that reducing the indemnity payments of audited claims induces a lower fraud rate at equilibrium and that some degree of nitpicking is socially optimal when insurance fraud is a concern. Itsremains optimal even if it induces adverse effects on policyholders' moral standards.
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