IDEAS home Printed from https://ideas.repec.org/a/eee/pubeco/v128y2015icp59-72.html
   My bibliography  Save this article

Global inspection games

Author

Listed:
  • Sanchez Villalba, Miguel

Abstract

In the tax evasion game – a typical example of “inspection game” – audits are costly and audit probabilities are determined by the tax agency based on the tax returns submitted by taxpayers. We find that if taxpayers' incomes are correlated (e.g., when they are subject to a common shock) the optimal audit probability for low declarations is an increasing function of the average declaration, as the latter is an informative signal of the realized level of income. Since a taxpayer's optimal declaration is an increasing function of the probability of an audit, the optimal auditing rule creates incentives for taxpayers to coordinate their declarations. The resulting coordination game features multiplicity of equilibria and thus “strategic uncertainty” about the equilibrium that will be selected.

Suggested Citation

  • Sanchez Villalba, Miguel, 2015. "Global inspection games," Journal of Public Economics, Elsevier, vol. 128(C), pages 59-72.
  • Handle: RePEc:eee:pubeco:v:128:y:2015:i:c:p:59-72
    DOI: 10.1016/j.jpubeco.2015.04.009
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0047272715000869
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Morris, Stephen & Shin, Hyun Song, 1998. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," American Economic Review, American Economic Association, vol. 88(3), pages 587-597, June.
    2. Frankel, David M. & Morris, Stephen & Pauzner, Ady, 2003. "Equilibrium selection in global games with strategic complementarities," Journal of Economic Theory, Elsevier, vol. 108(1), pages 1-44, January.
    3. Carlsson, Hans & van Damme, Eric, 1993. "Global Games and Equilibrium Selection," Econometrica, Econometric Society, vol. 61(5), pages 989-1018, September.
    4. Myles, Gareth D. & Naylor, Robin A., 1996. "A model of tax evasion with group conformity and social customs," European Journal of Political Economy, Elsevier, vol. 12(1), pages 49-66, April.
    5. Ennis, Huberto M. & Keister, Todd, 2005. "Government policy and the probability of coordination failures," European Economic Review, Elsevier, vol. 49(4), pages 939-973, May.
    6. Scotchmer, Suzanne & Slemrod, Joel, 1989. "Randomness in tax enforcement," Journal of Public Economics, Elsevier, vol. 38(1), pages 17-32, February.
    7. Fortin, Bernard & Lacroix, Guy & Villeval, Marie-Claire, 2007. "Tax evasion and social interactions," Journal of Public Economics, Elsevier, vol. 91(11-12), pages 2089-2112, December.
    8. Frank A. Cowell, 1990. "Cheating the Government: The Economics of Evasion," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262532484, March.
    9. Marco Bassetto & Christopher Phelan, 2008. "Tax Riots," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 649-669.
    10. Ron Borkovsky & Paul Ellickson & Brett Gordon & Victor Aguirregabiria & Pedro Gardete & Paul Grieco & Todd Gureckis & Teck-Hua Ho & Laurent Mathevet & Andrew Sweeting, 2015. "Multiplicity of equilibria and information structures in empirical games: challenges and prospects," Marketing Letters, Springer, vol. 26(2), pages 115-125, June.
    11. Stephen Morris & Hyun Song Shin, 2000. "Global Games: Theory and Applications," Cowles Foundation Discussion Papers 1275R, Cowles Foundation for Research in Economics, Yale University, revised Aug 2001.
    12. James Andreoni & Brian Erard & Jonathan Feinstein, 1998. "Tax Compliance," Journal of Economic Literature, American Economic Association, vol. 36(2), pages 818-860, June.
    13. Reinganum, Jennifer F. & Wilde, Louis L., 1985. "Income tax compliance in a principal-agent framework," Journal of Public Economics, Elsevier, vol. 26(1), pages 1-18, February.
    14. David P. Myatt & Hyun Song Shin & Chris Wallace, 2002. "The Assessment: Games and Coordination," Oxford Review of Economic Policy, Oxford University Press, vol. 18(4), pages 397-417.
    15. Angeletos, George-Marios & Pavan, Alessandro, 2013. "Selection-free predictions in global games with endogenous information and multiple equilibria," Theoretical Economics, Econometric Society, vol. 8(3), September.
    16. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
    17. Crawford, Vincent P., 1991. "An "evolutionary" interpretation of Van Huyck, Battalio, and Beil's experimental results on coordination," Games and Economic Behavior, Elsevier, vol. 3(1), pages 25-59, February.
    18. Slemrod, Joel & Blumenthal, Marsha & Christian, Charles, 2001. "Taxpayer response to an increased probability of audit: evidence from a controlled experiment in Minnesota," Journal of Public Economics, Elsevier, vol. 79(3), pages 455-483, March.
    19. Stella, Peter, 1991. "An economic analysis of tax amnesties," Journal of Public Economics, Elsevier, vol. 46(3), pages 383-400, December.
    20. Alm, James & McKee, Michael, 2006. "Audit Certainty, Audit Productivity, and Taxpayer Compliance," National Tax Journal, National Tax Association;National Tax Journal, vol. 59(4), pages 801-816, December.
    21. Vives, Xavier, 2004. "Complementarities and Games: New Developments," CEPR Discussion Papers 4742, C.E.P.R. Discussion Papers.
    22. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    23. 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.
    24. Áureo de Paula, 2013. "Econometric Analysis of Games with Multiple Equilibria," Annual Review of Economics, Annual Reviews, vol. 5(1), pages 107-131, May.
    25. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
    26. Youngse Kim, 2005. "Audit Misperception, Tax Compliance, and Optimal Uncertainty," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 7(3), pages 521-541, August.
    27. Alm, James & McKee, Michael, 2004. "Tax compliance as a coordination game," Journal of Economic Behavior & Organization, Elsevier, vol. 54(3), pages 297-312, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sanchez Villalba, Miguel, 2017. "Global Inspection Games (GIG) in the laboratory," MPRA Paper 80715, University Library of Munich, Germany.
    2. Sanchez Villalba, Miguel & Martinez Gorricho, Silvia, 2017. "Entry in Beauty-Contest Games," MPRA Paper 80515, University Library of Munich, Germany.

    More about this item

    Keywords

    Coordination/global games; Common shocks; Asymmetric information; Expectations; Tax evasion; Experimental economics;

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:pubeco:v:128:y:2015:i:c:p:59-72. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/inca/505578 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.