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Rank-Dependent Utility, Tax Evasion, and Labor Supply

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  • Erling Eide
  • Kristine von Simson
  • Steinar Strøm

Abstract

In a portfolio model of tax evasion an expected utility maximizer will cheat more than what is estimated in empirical studies. At least two types of explanation have been suggested as solutions to this puzzle: (1) taxpayers act according to some unexpected utility theory, and (2) individual ethical norms and social stigma induce people not to cheat. Based on Norwegian survey data, we find that a rank-dependent expected-utility model performs better than an expected-utility model and that social norms matter in explaining behavior.

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Bibliographic Info

Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

Volume (Year): 67 (2011)
Issue (Month): 3 (September)
Pages: 261-281

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Handle: RePEc:mhr:finarc:urn:sici:0015-2218(201109)67:3_261:ruteal_2.0.tx_2-z

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Keywords: labor supply; tax evasion; rank-dependent utility;

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References

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  1. Wakker, Peter & Erev, Ido & Weber, Elke U, 1994. "Comonotonic Independence: The Critical Test between Classical and Rank-Dependent Utility Theories," Journal of Risk and Uncertainty, Springer, vol. 9(3), pages 195-230, December.
  2. Yitzhaki, Shlomo, 1974. "Income tax evasion: A theoretical analysis," Journal of Public Economics, Elsevier, vol. 3(2), pages 201-202, May.
  3. Lacroix, G. & Fortin, B., 1991. "Utility-Based Estimation of Labor Supply Functions in the Regular and Irregular Sectors," Cahiers de recherche 9020, Université Laval - Département d'économique.
  4. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
  5. James Andreoni & Brian Erard & Jonathan Feinstein, 1998. "Tax Compliance," Journal of Economic Literature, American Economic Association, vol. 36(2), pages 818-860, June.
  6. Myles, Gareth D. & Naylor, Robin A., 1996. "A model of tax evasion with group conformity and social customs," European Journal of Political Economy, Elsevier, vol. 12(1), pages 49-66, April.
  7. Henrich, Joseph, 2004. "Cultural group selection, coevolutionary processes and large-scale cooperation," Journal of Economic Behavior & Organization, Elsevier, vol. 53(1), pages 3-35, January.
  8. Sanjit Dhami & Ali al-Nowaihi, 2005. "Why Do People Pay Taxes? Prospect Theory Versus Expected Utility Theory," Discussion Papers in Economics 05/23, Department of Economics, University of Leicester, revised Aug 2006.
  9. Marchese, Carla & Privileggi, Fabio, 1997. "Taxpayers' Attitudes toward Risk and Amnesty Participation: Economic Analysis and Evidence for the Italian Case," Public Finance = Finances publiques, , vol. 52(3-4), pages 394-410.
  10. Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June.
  11. Eide, Erling, 1998. "Optimal Provision of Public Goods with Rank Dependent Expected Utility," Public Finance = Finances publiques, , vol. 53(3-4), pages 296-311.
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Cited by:
  1. Erlend Bø & Peter Lambert & Thor Thoresen, 2012. "Horizontal inequity under a dual income tax system: principles and measurement," International Tax and Public Finance, Springer, vol. 19(5), pages 625-640, October.

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