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Fraud Deterrence in Dynamic Mirrleesian Economies

Author

Listed:
  • Thomas Mertens

    (NYU Stern)

  • Roc Armenter

    (FRB Philadelphia)

Abstract

Social and private insurance schemes rely on legal action to deter fraud and tax evasion. This observation guides us 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. We 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 capital. We characterize conditions such that the intertemporal wedge is negative in finite horizon economies. In an infinite-horizon economy, we find that the constrained efficient allocation converges to a high level of consumption, full insurance, and no labor distortions for any probablity of state-verification.

Suggested Citation

  • Thomas Mertens & Roc Armenter, 2010. "Fraud Deterrence in Dynamic Mirrleesian Economies," 2010 Meeting Papers 468, Society for Economic Dynamics.
  • Handle: RePEc:red:sed010:468
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    References listed on IDEAS

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    Cited by:

    1. Zoutman, Floris T. & Jacobs, Bas, 2016. "Optimal redistribution and monitoring of labor supply," Journal of Public Economics, Elsevier, vol. 135(C), pages 15-31.
    2. Chen, Yunmin & Chien, YiLi & Yang, C.C., 2015. "Individual and Aggregate Constrained Efficient Intertemporal Wedges in Dynamic Mirrleesian Economies," Working Papers 2015-43, Federal Reserve Bank of St. Louis, revised 01 Apr 2016.
    3. Ravikumar, B. & Zhang, Yuzhe, 2012. "Optimal auditing and insurance in a dynamic model of tax compliance," Theoretical Economics, Econometric Society, vol. 7(2), May.

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