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Corruption and Tax Evasion: Reflections on Greek Tragedy

Author

Listed:
  • Anastasia Litina

    (University of Luxembourg)

  • Theodore Palivos

    () (Athens University of Economics and Business)

Abstract

We provide empirical support and 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

  • Anastasia Litina & Theodore Palivos, 2015. "Corruption and Tax Evasion: Reflections on Greek Tragedy," Working Papers 193, Bank of Greece.
  • Handle: RePEc:bog:wpaper:193
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    References listed on IDEAS

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    Cited by:

    1. Litina, Anastasia & Palivos, Theodore, 2016. "Corruption, tax evasion and social values," Journal of Economic Behavior & Organization, Elsevier, vol. 124(C), pages 164-177.
    2. Alessandro Tampieri & Elena M. Parilina, 2014. "Stability and Cooperative Solution in Stochastic Games," CREA Discussion Paper Series 14-26, Center for Research in Economic Analysis, University of Luxembourg.

    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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