The Impact of Counterfeit Victims in the Victim Marketplace

Just and efficient allocations of charity have attracted much academic and media attention. The sources of inefficiency and unjust are important to understand yet understudied. Our study aims to fill this void by directly modelling the victims’ market in a collective reputation framework. By analyzing three types of individuals who signal their victim status with different personalities and incentives, we derive the honest, dishonest and unfunded equilibria as well as the mixed equilibrium where both types of these equilibria could coexist. Our analyses of the social welfare under each equilibrium shed light on key parameters that could potentially serve as policy instruments for improving social welfare. We also reveal that the mechanisms analogous to bank run and lemons market could take place in the victims’ market as much as in other markets. In particular, when charity resources are scarce, more strategic signallers could rush to emit false victim signals and drive the market to the dishonest equilibrium with lower social welfare. The need for screening signallers could drive up the psychological costs of authentic victims to the extent that they voluntarily drop out of the market and suffer alone, resulting in misplaced charity funds and severe deadweight losses. When there is psychological utility associated with cheating for the hedonic signallers, the social welfare is even worse off.