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Tax evasion in a principal-agent model with self-protection

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Author Info

  • Biswas, Rongili

    ()

  • Marchese, Carla

    ()

  • Privileggi, Fabio

    ()

Abstract

Gatekeepers have an increasing role in taxation and regulation. While burdening them with legal liability for misconducts that benefit those who resort to their services actually discourages wrongdoings — as will be clarified in the paper — an alienation effect can also arise. That is, the gatekeeper might become more interested in covering up the illegal behavior and in cooperating with the perpetrator. Such perverse effects are difficult to detect and to measure. This paper studies the problem with respect to tax evasion by firms, by building upon the classical Allingham and Sandmo (1972) model and by providing a more detailed description of the "concealment costs" than that available in the literature, which often simply makes assumptions about their existence and their functional form. The relationship between a risk neutral firm owner aiming at evading taxes and a risk averse gatekeeper is described through a simple principal-agent framework. The paper highlights the role of legal rules pertaining to liability for tax evasion in shaping the parties choices, since concealment costs vary according to whether the risk neutral principal or the risk averse agent are held responsible when tax evasion is detected. The main result of the analysis is that there are simple conditions under which one can easily infer whether harnessing the agent is socially beneficial.

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File URL: http://polis.unipmn.it/pubbl/RePEc/uca/ucapdv/marchese158.pdf
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Bibliographic Info

Paper provided by Institute of Public Policy and Public Choice - POLIS in its series POLIS Working Papers with number 138.

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Length: 28 pages
Date of creation: Dec 2009
Date of revision:
Handle: RePEc:uca:ucapdv:138

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Web page: http://polis.unipmn.it

Related research

Keywords: tax evasion; firm; agency; risk aversion;

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  1. Ehrlich, Isaac & Becker, Gary S, 1972. "Market Insurance, Self-Insurance, and Self-Protection," Journal of Political Economy, University of Chicago Press, vol. 80(4), pages 623-48, July-Aug..
  2. Cassone, Alberto, 2009. "L'impatto economico dell'Universita' del Piemonte Orientale "Amedeo Avogadro": un aggiornamento al 2008," POLIS Working Papers 132, Institute of Public Policy and Public Choice - POLIS.
  3. repec:ebl:ecbull:v:4:y:2005:i:6:p:1-8 is not listed on IDEAS
  4. Sandmo, Agnar, 2005. "The Theory of Tax Evasion: A Retrospective View," National Tax Journal, National Tax Association, vol. 58(4), pages 643-63, December.
  5. Keith J. Crocker & Joel Slemrod, 2004. "Corporate Tax Evasion with Agency Costs," NBER Working Papers 10690, National Bureau of Economic Research, Inc.
  6. Kong-Pin & C.Y. Cyrus Chu, 2005. "Internal Control versus External Manipulation: A Model of Corporate Income Tax Evasion," RAND Journal of Economics, The RAND Corporation, vol. 36(1), pages 151-164, Spring.
  7. 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.
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