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Anonymous Money, Moral Sentiments and Welfare

Author

Listed:
  • Vesa Kanniainen
  • Jenni Pääkkönen

Abstract

Some markets are prone to develop shadow transactions for the purpose of tax avoidance. Moral sentiments control the allocation of consumers between the legal and illicit markets. Such sentiments include self-esteem and social disapproval. The market solution leads to fiscal externality resulting from tax avoidance and highlights the conflict between private opportunism and collective values. Shadow markets may, however, enhance consumer welfare by limiting the pricing power of firms and by controlling tax collection. The paper develops a model of endogenous segmentation of markets between moral and immoral behavior. The legal producer can price the self-esteem of honest people, who can blackmail the legal producer with their option of visiting the illicit market. The model has implications for monetary economics: moral sentiments, tax rates, illegal transactions, and probability of being caught become relevant for the demand for money.

Suggested Citation

  • Vesa Kanniainen & Jenni Pääkkönen, 2004. "Anonymous Money, Moral Sentiments and Welfare," CESifo Working Paper Series 1258, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_1258
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp1258.pdf
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    References listed on IDEAS

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    1. Philip Cagan, 1958. "The Demand for Currency Relative to Total Money Supply," NBER Chapters,in: The Demand for Currency Relative to Total Money Supply, pages 1-37 National Bureau of Economic Research, Inc.
    2. Era Dabla-Norris & Andrew Feltenstein, 2003. "An Analysis of the Underground Economy and its Macroeconomic Consequences," IMF Working Papers 03/23, International Monetary Fund.
    3. Acemoglu, Daron, 1995. "Reward structures and the allocation of talent," European Economic Review, Elsevier, vol. 39(1), pages 17-33, January.
    4. Camera, Gabriele, 2001. "Dirty money," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 377-415, April.
    5. Phillip Cagan, 1958. "The Demand for Currency Relative to the Total Money Supply," Journal of Political Economy, University of Chicago Press, vol. 66, pages 303-303.
    6. Cowell, F.A., 1989. "Honesty is sometimes the best policy," European Economic Review, Elsevier, vol. 33(2-3), pages 605-617, March.
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    Cited by:

    1. Franco Mariuzzo & Patrick Paul Walsh & Ciara Whelan, 2004. "EU Merger Control in Differentiated Product Industries," CESifo Working Paper Series 1312, CESifo Group Munich.

    More about this item

    Keywords

    moral sentiments; shadow economy; welfare;

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