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Optimal Audit Policy and Heterogenous Agents

  • Marisa Ratto
  • Thibaud Verge


Frauds can be explained not only in terms of individual willingness to cheat, but may also be driven by opportunities to behave dishonestly. The audit policy should therefore be different for different categories of agents. This paper focuses on the optimal audit policy when there are two categories of agents and shows that the auditor adopts different policies depending on its budget. When resources are quite limited, the auditor sets identical audit probabilities for both types. On the other hand, in most of the cases, the authority should first ensure that people with lower opportunities choose not to commit an offence.

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Paper provided by Department of Economics, University of Bristol, UK in its series The Centre for Market and Public Organisation with number 02/054.

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Length: 35 pages
Date of creation: Dec 2002
Date of revision:
Handle: RePEc:bri:cmpowp:02/054
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  1. James Andreoni & Brian Erard & Jonathan Feinstein, 1998. "Tax Compliance," Journal of Economic Literature, American Economic Association, vol. 36(2), pages 818-860, June.
  2. 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.
  3. Scotchmer, Suzanne, 1987. "Audit Classes and Tax Enforcement Policy," American Economic Review, American Economic Association, vol. 77(2), pages 229-33, May.
  4. Graetz, Michael J. & Reinganum, Jennifer F. & Wilde, Louis L., . "The Tax Compliance Game: Toward an Interactive Theory of Law Enforcement," Working Papers 589, California Institute of Technology, Division of the Humanities and Social Sciences.
  5. Hindriks, J., 1999. "Income Tax Compliance: the No-Commitment Game," Discussion Papers 9919, Exeter University, Department of Economics.
  6. Reinganum, Jennifer F & Wilde, Louis L, 1986. "Equilibrium Verification and Reporting Policies in a Model of Tax Compliance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(3), pages 739-60, October.
  7. Picard, Pierre, 1996. "Auditing claims in the insurance market with fraud: The credibility issue," Journal of Public Economics, Elsevier, vol. 63(1), pages 27-56, December.
  8. Picard, Pierre, 1994. "Auditing claims in insurance market with fraud : the credibility issue," CEPREMAP Working Papers (Couverture Orange) 9420, CEPREMAP.
  9. Greenberg, Joseph, 1984. "Avoiding tax avoidance: A (repeated) game-theoretic approach," Journal of Economic Theory, Elsevier, vol. 32(1), pages 1-13, February.
  10. Cremer, H. & Marchand, M. & Pestieau, P., 1988. "Evading, Auditing And Taxing: The Equity-Compliance Tradeoff," Papers 401, Cornell - Department of Economics.
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