Who Commits Fraud? Evidence From Korean Gas Stations

Abstract

In this article, we study under what circumstances a gas station is more likely to commit fuel fraud. Using a new and hitherto unexploited list of fuel fraud detections, we find evidence that stations under less favorable economic conditions -- more competitors, lower retail fuel price, or higher operating costs -- engage in fraudulent activity more often, while the reputational incentives for product credibility is stronger for chain stations than independent ones. Also, fuel fraud tends to cluster among nearby stations, suggesting that illicit activity may be propagated from one station to others nearby. As for pricing behavior, in general gas stations seem to keep price constant and take higher price-cost margins when selling adulterated fuel, suggesting that consumers are harmed by this kind of fraud.