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Abstract

We analyze the tax evasion problem with social interaction among the taxpayers. If the authority commits to a fixed auditing probability, a positive share of cheating is obtained in equilibrium. This stands in contrast to the existing literature, which yields full compliance of audited taxpayers who are rational and thus do not need to interact. When the authority adjusts the auditing probability every period, cycling in cheating-auditing occurs. Thus, the real life phenomenon of compliance fluctuations is explained within the model rather than by exogenous parameter shifts. Our analysis can also be applied to crime, safety regulations, employment and environmental protection, as well as other compliance problems.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 8829.

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Date of creation: 28 Mar 2008
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Handle: RePEc:pra:mprapa:8829

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Related research

Keywords: tax evasion; learning; social interaction; behavioral rule; compliance;

Find related papers by JEL classification:

• C79 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Other
• D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
• K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
• H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion

This paper has been announced in the following NEP Reports:

• NEP-ACC-2008-05-31 (Accounting & Auditing)
• NEP-ALL-2008-05-31 (All new papers)
• NEP-LAW-2008-05-31 (Law & Economics)
• NEP-SOC-2008-05-31 (Social Norms & Social Capital)

References

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Cited by:

1. Fershtman, Chaim & Lipatov, Vilen, 2009. "Political Support and Tax Compliance: A Social Interaction Approach," CEPR Discussion Papers 7554, C.E.P.R. Discussion Papers.

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