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The Hidden Costs of Tax Evasion - Collaborative Tax Evasion in Markets for Expert Services

  • Loukas Balafoutas

    ()

  • Adrian Beck

    ()

  • Rudolf Kerschbamer

    ()

  • Matthias Sutter

    ()

In markets where transactions are governed by contractual incompleteness, revealed intentions to evade taxes may affect market performance. We experimentally examine the impact of tax evasion attempts on the performance of credence goods markets, where contractual incompleteness results from asymmetric information on the welfare maximizing quality of the good. We find that tax evasion attempts – independently of whether they are successful or not – lead to efficiency losses in the form of too low quality and less frequent trade. Thus, shadow economies induce an excess burden not only by hampering the collection of tax revenues, but also by reducing market efficiency.

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Paper provided by Faculty of Economics and Statistics, University of Innsbruck in its series Working Papers with number 2014-01.

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Length: 42
Date of creation: Jan 2014
Date of revision:
Handle: RePEc:inn:wpaper:2014-01
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