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Decentralized Deterrence, with an Application to Labor Tax Auditing

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  • Di Porto, Edoardo
  • Persico, Nicola
  • Sahuguet, Nicolas

Abstract

Deterrence of illegal activities is frequently carried out by many atomistic auditors (tax auditors, law enforcement agents, etc.). Not much is known either normatively about the best way to incentivize atomistic auditors, nor positively about what these incentives actually look like in real world organizations. This paper focuses almost exclusively on the positive question. It proposes a game-theoretic model of decentralized deterrence and an empirical test, based on the equilibrium of the model, to identify the incentives of individual auditors. In the special (but important) case of tax enforcement, the paper fully characterizes the equilibrium of a strategic auditing game and provides a method to calibrate its parameters based on audit data. Applying the model and method to Italian auditing data provides ‘proof of concept’: the methods are practical and tractable. We are able to provide an estimate of tax evasion based on (non-random) audit data alone. Counterfactual simulation of the model quantifies the costs and benefits of alternative auditing policies. We compare decentralized enforcement with a counterfactual commitment policy, and compute the loss from the former. Thus we are able to quantify the costs of decentralizing enforcement.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8901.

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Date of creation: Mar 2012
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Handle: RePEc:cpr:ceprdp:8901

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Keywords: audits; deterrence; tax evasion;

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Cited by:
  1. Edoardo Di Porto & Leandro Elia & Cristina Tealdi, 2013. "The "emersion" effect: an ex post and ex ante social program evaluation on labor tax evasion in Italy," Working Papers 2/2013, IMT Institute for Advanced Studies Lucca, revised Jun 2013.
  2. David K Levine & Salvatore Modica, 2013. "Peer Discipline and the Strength of Organizations," Levine's Bibliography 786969000000000713, UCLA Department of Economics.

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