This paper considers the existence of bad equilibria in a random auditing tax model with limits on the number of households which can be audited. Specifically, we present sufficient conditions for a tax-audit mechanism which has truth telling as one equilibrium to have other equilibiria in which households conceal income. Further, we present conditions such that the optimal tax-audit mechanism delivered by a standard mechanism design approach displays these characteristics. Our main idea is that in a realistic model of taxation and auditing, incentives which are sufficient to induce truth-telling when households expect other households to tell the truth are generally insufficient to induce truth telling when households expect other households to cheat
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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number
375.
Length: Date of creation: 2004 Date of revision: Handle: RePEc:red:sed004:375
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Marco Bassetto & Christopher Phelan, 2008.
"Tax Riots,"
Review of Economic Studies,
Blackwell Publishing, vol. 75(3), pages 649-669, 07.
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Paper
Marco Bassetto & Christopher Phelan, 2006.
"Tax riots,"
Working Paper Series
WP-06-04, Federal Reserve Bank of Chicago.
[Downloadable!]
Christopher Phelan & Marco Bassetto, 2005.
"Tax Riots,"
2005 Meeting Papers
433, Society for Economic Dynamics.
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Find related papers by JEL classification: H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Levine, David K & Pesendorfer, Wolfgang, 1995.
"When Are Agents Negligible?,"
American Economic Review,
American Economic Association, vol. 85(5), pages 1160-70, December.
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Other versions:
Wolfgang Pesendorfer & David Levine, 1992.
"When are Agents Negligible?,"
Discussion Papers
1018, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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