How to detect a salami slicer: a stochastic controller-stopper game with unknown competition

Abstract

We consider a stochastic game of control and stopping specified in terms of a process $X_t=-\theta {\Lambda }_t+W_t$, representing the holdings of Player 1, where $W$ is a Brownian motion, $\theta$ is a Bernoulli random variable indicating whether Player 2 is active or not, and $\Lambda$ is a non-decreasing process representing the accumulated "theft" or "fraud" performed by Player 2 (if active) against Player 1. Player 1 cannot observe $\theta$ or $\Lambda$ directly, but can merely observe the path of the process $X$ and may choose a stopping rule $\tau$ to deactivate Player 2 at a cost $M$. Player 1 thus does not know if she is the victim of fraud and operates in this sense under unknown competition. Player 2 can observe both $\theta$ and $W$ and seeks to choose the fraud strategy $\Lambda$ that maximizes the expected discounted amount \[{\mathbb E} \left [θ\int _0^τ e^{-rs} dΛ_s \right ],\] whereas Player 1 seeks to choose the stopping strategy $\tau$ so as to minimize the expected discounted cost \[{\mathbb E} \left [θ\int _0^τ e^{-rs} dΛ_s + e^{-rτ}M{\mathbb I}_{\{τ<\infty\}} \right ].\] This non-zero-sum game appears to be novel and is motivated by applications in fraud detection; it combines filtering (detection), non-singular control, stopping, strategic features (games) and asymmetric information. We derive Nash equilibria for this game; for some parameter values we find an equilibrium in pure strategies, and for other parameter values we find an equilibrium by allowing for randomized stopping strategies.