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Evasive Ability and the Efficiency Cost of the Underground Economy

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  • Filip Palda

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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Bibliographic 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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Cited by:
  1. Palda, Filip, 2000. " Improper Selection of High-Cost Producers in the Rent-Seeking Contest," Public Choice, Springer, Springer, vol. 105(3-4), pages 291-301, December.
  2. Steven J. Davis & Magnus Henrekson, 2010. "Economic Performance and Market Work Activity in Sweden After the Crisis of the Early 1990s," NBER Chapters, in: Reforming the Welfare State: Recovery and Beyond in Sweden, pages 225-252 National Bureau of Economic Research, Inc.
  3. World Bank, 2014. "Albania Public Finance Review : Part 1. Toward a Sustainable Fiscal Policy for Growth," World Bank Other Operational Studies 17279, The World Bank.
  4. 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, Springer, vol. 42(3), pages 139-158, August.
  5. Emran, M. Shahe, 2005. "Revenue-increasing and welfare-enhancing reform of taxes on exports," Journal of Development Economics, Elsevier, Elsevier, vol. 77(1), pages 277-292, June.
  6. 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, The Ratio Institute 57, The Ratio Institute.
  7. Davidson, Carl & Martin, Lawrence & Wilson, John Douglas, 2007. "Efficient black markets?," Journal of Public Economics, Elsevier, Elsevier, vol. 91(7-8), pages 1575-1590, August.
  8. Pierre-Jean Benghozi & Walter Santagata, 2001. "Market Piracy in the Design-Based Industry : Economics and Policy regulation," Post-Print hal-00262515, HAL.
  9. Steven J. Davis & Magnus Henrekson, 2006. "Economic Performance and Work Activity in Sweden after the Crisis of the Early 1990s," NBER Working Papers 12768, National Bureau of Economic Research, Inc.
  10. Filip Palda, 2001. "A New Look at the Laffer Curve and the Displacement Loss from Tax Evasion," Public Economics, EconWPA 0111006, EconWPA.
  11. 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, EconWPA 0209007, EconWPA.

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