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Public debt, corruption and tax evasion: Nash and Stackelberg equilibria

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  • Halkos, George
  • Papageorgiou, George

Abstract

Public debt accumulation results to disutility with the problem addressed as whether time path of the public debt is sustainable. In this study the infinite time differential game modeling is used as appropriate tool for the economic analysis that follows. The dynamic game is simple and assumes that the starting point of the public debt model is the well known accounting identity interrelating public debt, interest rate and real government surplus exclusive of interest payments on public debt. In the setting, we consider as stock the public debt and the stress of the regulator is to raise nation’s primary surplus. Any surplus increase is not only dependent on government measures, but is also dependent on the known “culture of corruption” and on tax evasion. Thus the process of surpluses’ augmentation should be a function of these two factors. Nash and Stackelberg differential game approaches are used to explore strategic interactions. In the Nash equilibrium establishment of cyclical strategies during the game between the group of people involved in illegal activities of corruption and tax evasion in one hand and the government in the other, requires that the discount rate of the group of people involved in illegal actions must be greater than government’s discount rate. That is the group of corrupt officials and evaders must be more impatient than government. In the case of hierarchical setting analytical expressions of the strategies and the steady state value of public debt stock are provided. Furthermore a number of propositions are stated.

Suggested Citation

  • Halkos, George & Papageorgiou, George, 2017. "Public debt, corruption and tax evasion: Nash and Stackelberg equilibria," MPRA Paper 77519, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:77519
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    File URL: https://mpra.ub.uni-muenchen.de/77519/1/MPRA_paper_77519.pdf
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    References listed on IDEAS

    as
    1. Skiba, A K, 1978. "Optimal Growth with a Convex-Concave Production Function," Econometrica, Econometric Society, vol. 46(3), pages 527-539, May.
    2. Halkos, George, 2011. "Prevention of stock accumulation by restricting polluters’ resources," MPRA Paper 30466, University Library of Munich, Germany.
    3. Xepapadeas, A. P., 1992. "Environmental policy design and dynamic nonpoint-source pollution," Journal of Environmental Economics and Management, Elsevier, vol. 23(1), pages 22-39, July.
    4. Wirl Franz, 1995. "The Cyclical Exploitation of Renewable Resource Stocks May Be Optimal," Journal of Environmental Economics and Management, Elsevier, vol. 29(2), pages 252-261, September.
    5. Halkos, George, 2011. "Cyclical and constant strategies in renewable resources extraction," MPRA Paper 34654, University Library of Munich, Germany.
    6. Forster, Bruce A., 1980. "Optimal energy use in a polluted environment," Journal of Environmental Economics and Management, Elsevier, vol. 7(4), pages 321-333, December.
    7. Engelbert Dockner & Gustav Feichtinger, 1991. "On the optimality of limit cycles in dynamic economic systems," Journal of Economics, Springer, vol. 53(1), pages 31-50, February.
    8. Clark, Colin W & Clarke, Frank H & Munro, Gordon R, 1979. "The Optimal Exploitation of Renewable Resource Stocks: Problems of Irreversible Investment," Econometrica, Econometric Society, vol. 47(1), pages 25-47, January.
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    More about this item

    Keywords

    Public debt; Tax evasion; Dynamic games; Nash equilibrium; Stackelberg equilibrium;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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