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Size-Dependent Enforcement, Tax Evasion and Dimensional Trap

Author

Listed:
  • Raffaella Coppier

    (University of Macerata)

  • Elisabetta Michetti

    (University of Macerata)

  • Luisa Scaccia

    (University of Macerata)

Abstract

Size-dependent tax enforcement is quite widespread worldwide, but the literature on its effects over firms’ behaviour is very scarce. By assuming different audit probabilities for small and large firms, we propose a dynamic model to study the consequences of size-dependent monitoring level on a firm’ fiscal compliance and its decision to invest and grow in a single-firm perspective. By combining analytical findings and simulation results, we show that: (1) under certain conditions, a dimensional trap may emerge, as small firms have no advantage in growing and prefer to remain small to avoid stronger enforcement; (2) audit activity and fine levels are important tools available to the State to fight evasion, but a careful calibration is required not to incur undesired effects.

Suggested Citation

  • Raffaella Coppier & Elisabetta Michetti & Luisa Scaccia, 2025. "Size-Dependent Enforcement, Tax Evasion and Dimensional Trap," Computational Economics, Springer;Society for Computational Economics, vol. 65(2), pages 585-611, February.
    • Handle: RePEc:kap:compec:v:65:y:2025:i:2:d:10.1007_s10614-023-10399-y
    DOI: 10.1007/s10614-023-10399-y
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    More about this item

    Keywords

    Tax evasion; Dynamics; Dimensional trap; Investment choices;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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