This paper considers the existence of bad equilibria in a random auditing tax model with limits on the number of households which can be audited. Specifically, we present sufficient conditions for a tax-audit mechanism which has truth telling as one equilibrium to have other equilibiria in which households conceal income. Further, we present conditions such that the optimal tax-audit mechanism delivered by a standard mechanism design approach displays these characteristics. Our main idea is that in a realistic model of taxation and auditing, incentives which are sufficient to induce truth-telling when households expect other households to tell the truth are generally insufficient to induce truth telling when households expect other households to cheat
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|Date of creation:||2004|
|Date of revision:|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
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