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Corruption, tax evasion and social values

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  • Litina, Anastasia
  • Palivos, Theodore

Abstract

We provide a theoretical explanation for the vicious circle of political corruption and tax evasion in which countries often fall into. We address this issue in the context of a model with two distinct groups of agents: citizens and politicians. Citizens decide the fraction of their income for which they evade taxes. Politicians decide the fraction of the public budget that they peculate. We show that multiple self-fulfilling equilibria with different levels of corruption can emerge based on the existence of strategic complementarities, indicating that “corruption may corrupt.” Furthermore, we find that standard deterrence policies cannot eliminate the multiplicity of equilibria. Instead, policies that impose a strong moral cost on tax evaders and corrupt politicians can lead to a unique equilibrium.

Suggested Citation

  • Litina, Anastasia & Palivos, Theodore, 2016. "Corruption, tax evasion and social values," Journal of Economic Behavior & Organization, Elsevier, vol. 124(C), pages 164-177.
  • Handle: RePEc:eee:jeborg:v:124:y:2016:i:c:p:164-177
    DOI: 10.1016/j.jebo.2015.09.017
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    Cited by:

    1. Leopoldo Fergusson & Carlos Molina & Juan Felipe Riaño, 2017. "I evade taxes, and so what? A new database and evidence from Colombia," DOCUMENTOS CEDE 015444, UNIVERSIDAD DE LOS ANDES-CEDE.
    2. Cyan, Musharraf R. & Koumpias, Antonios M. & Martinez-Vazquez, Jorge, 2016. "The determinants of tax morale in Pakistan," Journal of Asian Economics, Elsevier, vol. 47(C), pages 23-34.
    3. repec:spr:joecth:v:63:y:2017:i:4:d:10.1007_s00199-016-0976-1 is not listed on IDEAS
    4. Litina, Anastasia, 2014. "Great Expectations: The Persistent Effect of Institutions on Culture," MPRA Paper 58639, University Library of Munich, Germany.
    5. Chowdhury Mohammad Sakib Anwar & Alexander Matros & Sonali Sen Gupta, 2018. "Tax Evasion, Embezzlement and Public Good Provision," Working Papers 232397285, Lancaster University Management School, Economics Department.

    More about this item

    Keywords

    Corruption; Tax evasion; Multiple equilibria; Social stigma;

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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