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Fraud deterrence in dynamic Mirrleesian economies

  • Roc Armenter
  • Thomas M. Mertens

Social and private insurance schemes rely on legal action to deter fraud and tax evasion. This observation guides the authors to introduce a random state verification technology in a dynamic economy with private information. With some probability, an agent's skill level becomes known to the planner, who prescribes a punishment if the agent is caught misreporting. The authors show how deferring consumption can ease the provision of incentives. As a result, the marginal benefit may be below the marginal cost of investment in the constrained-efficient allocation, suggesting a subsidy on savings. They characterize conditions such that the intertemporal wedge is negative in finite horizon economies. In an infinite horizon economy, the authors find that the constrained-efficient allocation converges to a high level of consumption, full insurance, and no labor distortions for any probability of state verification.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 10-7.

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Date of creation: 2010
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Handle: RePEc:fip:fedpwp:10-7
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  2. Stefania Albanesi & Christopher Sleet, 2004. "Dynamic optimal taxation with private information," Discussion Paper / Institute for Empirical Macroeconomics 140, Federal Reserve Bank of Minneapolis.
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  15. B. Ravikumar & Yuzhe Zhang, 2011. "Optimal auditing and insurance in a dynamic model of tax compliance," Working Papers 2011-020, Federal Reserve Bank of St. Louis.
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  17. Salanié, Bernard, 2011. "The Economics of Taxation," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262016346, June.
  18. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
  19. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
  20. Tuomala, Matti, 1990. "Optimal Income Tax and Redistribution," OUP Catalogue, Oxford University Press, number 9780198286059, March.
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