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Evasive Ability and the Efficiency Cost of the Underground Economy

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Author Info
Filip Palda

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Abstract

In the presence of differing abilities to evade taxes, markets select producers for their evasive skills and their abilities to keep costs of production low. Inefficient firms crowd out efficient firms. If the least efficient firms are the best tax evaders, adverse selection is severe and output comes entirely from the high cost end of the supply curve. Tax revenue may be greater under tax evasion than without evasion if evasive ability allows government to act as a price-discriminating monopolist. When evasive and productive talents are unrelated this result disappears, but the deadweight loss due to adverse selection of firms persists and rivals the size of the traditional triangle deadweight loss.

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File URL: http://economics.ca/cgi/xms?jab=v31n5/06.pdf
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Publisher Info
Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 31 (1998)
Issue (Month): 5 (November)
Pages: 1118-1138
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Handle: RePEc:cje:issued:v:31:y:1998:i:5:p:1118-1138

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Related research
Keywords:

Find related papers by JEL classification:
H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Davis, Steven J. & Henrekson, Magnus, 2007. "Economic Perfomance and Work Activity in Sweden after the Crisis of the Early 1990s," Working Paper Series 687, Research Institute of Industrial Economics. [Downloadable!]
    Other versions:
  2. Davis, Steven J. & Henrekson, Magnus, 2004. "Tax Effects on Work Activity, Industry Mix and Shadow Economy Size: Evidence from Rich-Country Comparisons," Ratio Working Papers 57, The Ratio Institute. [Downloadable!]
    Other versions:
  3. Jan Hanousek & Filip Palda, 2009. "Is there a displacement deadweight loss from tax evasion? Estimates using firm surveys from the Czech Republic," Economic Change and Restructuring, Springer, vol. 42(3), pages 139-158, August. [Downloadable!] (restricted)
    Other versions:
  4. Filip Palda, 2001. "A New Look at the Laffer Curve and the Displacement Loss from Tax Evasion," Public Economics 0111006, EconWPA. [Downloadable!]
  5. Filip Palda, 2001. "Improper Selection of High-Cost Producers in the Rent-Seeking Contest," Public Economics 0112001, EconWPA. [Downloadable!]
    Other versions:
  6. Jan Hanousek & Filip Palda, 2002. "Quality of Government Services and the Civic Duty to Pay Taxes in the Czech and Slovak Republics, and other Transition Countries," Public Economics 0209007, EconWPA. [Downloadable!]
    Other versions:
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This page was last updated on 2009-10-28.

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