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Why Does the Government Obey the Constitution? Theory and Application to Tax Evasion

  • K.J. Bernhard Neumaerker
  • Gerald Pech

Under a constitution, which establishes a state under the rule of law, violations of unconstitutional laws are not punished. We argue that this is the true strength of the constitution. In our model, citizens decide on whether or not to evade taxes. For this they have to infer their probability of getting fined. The belief that - after the government defected once - a switch back to the constitution occurs is shown to be self-fulfilling in a game with imperfectly observable reliability of the government. We show that this prospect can deter even an unwilling government from defecting at the outset.

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Paper provided by Centre for Research into Industry, Enterprise, Finance and the Firm in its series CRIEFF Discussion Papers with number 0113.

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Date of creation: Feb 2001
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Handle: RePEc:san:crieff:0113
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  1. Stephen Morris & Hyun Song Shin, 1998. "A Theory of the Onset of Currency Attacks," Cowles Foundation Discussion Papers 1204, Cowles Foundation for Research in Economics, Yale University.
  2. Miller, Merton, 1998. "Asian financial crisis," Japan and the World Economy, Elsevier, vol. 10(3), pages 355-358, July.
  3. Kolm, Serge-Christophe, 1973. "A note on optimum tax evasion," Journal of Public Economics, Elsevier, vol. 2(3), pages 265-270, July.
  4. Carlsson, H. & van Damme, E.E.C., 1993. "Global games and equilibrium selection," Other publications TiSEM 49a54f00-dcec-4fc1-9488-4, Tilburg University, School of Economics and Management.
  5. Morris, Stephen & Shin, Hyun Song, 1998. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," American Economic Review, American Economic Association, vol. 88(3), pages 587-97, June.
  6. Brennan,Geoffrey & Buchanan,James M., 2006. "The Power to Tax," Cambridge Books, Cambridge University Press, number 9780521027922, December.
  7. Yin, Chien-Chung, 1998. "Equilibria of Collective Action in Different Distributions of Protest Thresholds," Public Choice, Springer, vol. 97(4), pages 535-67, December.
  8. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
  9. Stephen Morris & Hyun S Shin, 2001. "Global Games: Theory and Applications," Levine's Working Paper Archive 122247000000001080, David K. Levine.
  10. Kotlikoff, Laurence J & Persson, Torsten & Svensson, Lars E O, 1988. "Social Contracts as Assets: A Possible Solution to the Time-Consistency Problem," American Economic Review, American Economic Association, vol. 78(4), pages 662-77, September.
  11. Yitzhaki, Shlomo, 1974. "Income tax evasion: A theoretical analysis," Journal of Public Economics, Elsevier, vol. 3(2), pages 201-202, May.
  12. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 797-817.
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