Fraud is inevitable in both the public and private sectors, because human nature is the same everywhere. Cheats will find a way to abuse any system.
However, incentives to root out fraud differ widely in the public and private sectors, as illustrated in a few recent stories here and here.
In the private sector, fraud eats away at profit, as well as undermining credibility in the marketplace. Private corporations are therefore highly motivated to root out fraud, and will spend as much as they need to reduce it to a negligible amount.
In the public sector, there is no profit motive to speak of, and marketplace credibility is less of an issue because government is a monopoly. Fraud, per se, does no direct damage to the well-being of a government organization. The awareness of fraud, however, does do harm, since government actors can be penalized when fraud comes to light (individually by management, corporately by appropriators).
Thus, in the public sector the primary incentive is to reduce the awareness of fraud, and not necessarily fraud itself.
This can be accomplished both by reducing the occurrence of fraud, as well as by reducing the discovery of fraud. Therefore, in the public sector, fraud enforcement is a double-edged sword, with the potential both to reduce actual fraud AND to increase the awareness of fraud.
Listen carefully to legislators and managers. When talking about fraud, they'll almost always refer to the amount of known fraud, as though this were a true measure of actual fraud. The smaller the known fraud, the smaller the problem.
Given these incentives, one would expect public sector fraud enforcement to be minimal, and that is in fact the case. Often, there is just enough enforcement to give the appearance of accountability, without the fact. In the case of Medicare, this enforcement is generously put at one-fifth of one percent, despite the fact that studies show that such enforcement pays out 13 dollars for every one invested.
But public sector appropriators and managers typically view budgets in static terms. Every dollar spent on fraud enforcement is a dollar not spent on programs (since there is not profit to preserve, or increase). The static view presents yet another disincentive for funding fraud enforcement: dollars spent on enforcement are not spent on programs.
The difference in fraud enforcement between the public and private sectors is precisely that which is predicted by Milton Friedman when he speaks of how we spend other people's money on other people's services. We don't care about the cost, and we don't care about the outcome.
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