While statisticians have simulated the expected rate of growth in pyramid schemes, this research examines actual data on the spread of an alleged pyramid scheme in Montana. Fortune Hi-Tech Marketing (FHTM) was a multilevel marketing firm, sued by six states and the Federal Trade Commission and permanently shut down in 2014. Data from a settlement with the State of Montana provide a population of participants in a geographic region with definable markets and offer unique insights into local contagion. The authors analyze the pattern of FHTM adoption within a diffusion-ofinnovation framework. The findings confirm that nearly all adoption results from interpersonal influence (i.e., imitation) and indicate that participation is higher in counties with larger economic contractions. The authors add to existing guidance about early indicators of fraudulent activity and discuss intervention and prevention strategies that reflect the imitative nature of this diffusion process.
Purpose
This paper aims to empirically identify factors that increase consumer vulnerability to pyramid scheme fraud and compares/contrasts dynamics and implications of pyramid and Ponzi fraud.
Design/methodology/approach
Statistical techniques, including multiple regression, are used to analyze participant data (with over half a million individuals) from a now-defunct US-based pyramid scheme, Fortune Hi-Tech Marketing.
Findings
Findings suggest that this pyramid scheme flourished in counties with identifiable affinity groups: religious communities, Hispanic populations and certain age cohorts (e.g. recently retired). Recruitment success varied significantly between geographic regions, with the highest levels of recruitment in the South. While prior research finds a possible positive relationship between education and Ponzi participation, this is not the case in the pyramid scheme studied. Furthermore, while Ponzi schemes might be pro-cyclical, collapsing during contractions when participants seek to extract their money, this pyramid scheme exhibited counter-cyclical behavior.
Practical implications
State and federal regulators, as well as consumer protection advocates, should learn from analysis of past pyramid scheme cases. Such analysis informs allocation of scarce resources and supports the case for targeted, active education. Clarifying differences between Ponzi and pyramid fraud helps to support clear and effective intervention.
Originality/value
This is the first research to analyze national participant-level data from a pyramid scheme to inform future action. While it confirms some past findings, such as the connection to affinity fraud, it adds to collective knowledge on pyramid schemes and the differences between pyramid and Ponzi fraud.
Multi‐level marketing (MLM) firms recruit individuals into a business opportunity but are not required to disclose the earnings of past participants. Some MLMs voluntarily create income disclosures, which may serve both marketing and risk‐management functions. We create an economic experiment to explore the impact of MLM income disclosure on consumer interest and expectations. Results suggest that disclosure does not significantly alter interest in the business opportunity but does reduce expectations, on average, when subjects are asked to estimate annual income in a lab environment. We discuss findings in the context of current regulatory policy. (JEL D18, D82, M38)
Multi-level marketing (mlm) firms offer recruits the opportunity to earn compensation through starting their own direct selling business and often characterize mlm work as part of the “gig” economy. mlm promotes flexibility, autonomy, and income potential but data suggest that most participants fail to make money. Decisions are made under uncertainty as there is asymmetric information on potential outcomes and their respective likelihood. We use the first nationally representative survey (N = 1016) to understand the motivations for participating in mlm “gigs,” the social and financial outcomes of participation, and the correlates of those outcomes. While approximately three-fourths of mlm workers report that they joined for financial returns, a similar share reported that they did not earn any profit. Results identify a mismatch between expectations and outcomes and underscore decision biases in the context of uncertain financial rewards alongside broader gig economy regulatory concerns.
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