Fraud deterrence in dynamic Mirrleesian economies
AbstractSocial and private insurance schemes rely on legal action to deter fraud and tax evasion. This observation guides the authors to introduce a random state verification technology in a dynamic economy with private information. With some probability, an agent's skill level becomes known to the planner, who prescribes a punishment if the agent is caught misreporting. The authors show how deferring consumption can ease the provision of incentives. As a result, the marginal benefit may be below the marginal cost of investment in the constrained-efficient allocation, suggesting a subsidy on savings. They characterize conditions such that the intertemporal wedge is negative in finite horizon economies. In an infinite horizon economy, the authors find that the constrained-efficient allocation converges to a high level of consumption, full insurance, and no labor distortions for any probability of state verification.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 10-7.
Date of creation: 2010
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-04-11 (All new papers)
- NEP-CTA-2010-04-11 (Contract Theory & Applications)
- NEP-IAS-2010-04-11 (Insurance Economics)
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- B. Ravikumar & Yuzhe Zhang, 2011.
"Optimal auditing and insurance in a dynamic model of tax compliance,"
2011-020, Federal Reserve Bank of St. Louis.
- Zhang, Yuzhe & Ravikumar, B., 2012. "Optimal auditing and insurance in a dynamic model of tax compliance," Theoretical Economics, Econometric Society, vol. 7(2), May.
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