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Social Interaction in Tax Evasion

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Author Info
Lipatov, Vilen

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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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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

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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

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  1. Brian Erard & Jonathan S. Feinstein, 1994. "Honesty and Evasion in the Tax Compliance Game," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 1-19, Spring. [Downloadable!] (restricted)
    Other versions:
  2. Joel Slemrod, 2004. "The Economics of Corporate Tax Selfishness," NBER Working Papers 10858, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Sanchez, Isabel & Sobel, Joel, 1993. "Hierarchical design and enforcement of income tax policies," Journal of Public Economics, Elsevier, vol. 50(3), pages 345-369, March. [Downloadable!] (restricted)
    Other versions:
  4. Charles F. Manski, 2000. "Economic Analysis of Social Interactions," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 115-136, Summer. [Downloadable!] (restricted)
    Other versions:
  5. Reinganum, Jennifer F & Wilde, Louis L, 1986. "Equilibrium Verification and Reporting Policies in a Model of Tax Compliance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(3), pages 739-60, October. [Downloadable!] (restricted)
  6. David E. A. Giles, & Patrick J. Caragata, 1999. "The Learning Path of the Hidden Economy: The Tax Burden and Tax Evasion in New Zealand," Econometrics Working Papers 9904, Department of Economics, University of Victoria. [Downloadable!]
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  7. Poterba, James M, 1987. "Tax Evasion and Capital Gains Taxation," American Economic Review, American Economic Association, vol. 77(2), pages 234-39, May. [Downloadable!] (restricted)
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  8. Wane, Waly, 2000. "Tax evasion, corruption, and the remuneration of heterogeneous inspectors," Policy Research Working Paper Series 2394, The World Bank. [Downloadable!]
  9. Schlag, Karl H., 1998. "Why Imitate, and If So, How?, : A Boundedly Rational Approach to Multi-armed Bandits," Journal of Economic Theory, Elsevier, vol. 78(1), pages 130-156, January. [Downloadable!] (restricted)
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  10. repec:att:wimass:199610 is not listed on IDEAS
  11. Ross Cressman & Jean-Francois Wen & William Morrison, 1998. "On the Evolutionary Dynamics of Crime," Canadian Journal of Economics, Canadian Economics Association, vol. 31(5), pages 1101-1117, November. [Downloadable!] (restricted)
  12. Bardsley, P., 1997. "Tax Compliance Games with Imperfect Auditing," Department of Economics - Working Papers Series 548, The University of Melbourne.
  13. Friedrich Schneider & Dominik H. Enste, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March. [Downloadable!] (restricted)
  14. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November. [Downloadable!] (restricted)
  15. Clotfelter, Charles T, 1983. "Tax Evasion and Tax Rates: An Analysis of Individual Returns," The Review of Economics and Statistics, MIT Press, vol. 65(3), pages 363-73, August. [Downloadable!] (restricted)
  16. Eduardo M.R.A. Engel & James R. Hines, Jr., 1999. "Understanding Tax Evasion Dynamics," NBER Working Papers 6903, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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