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Tax evasion in a principal-agent model with self-protection

Author

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  • Biswas, Rongili

    ()

  • Marchese, Carla

    ()

  • Privileggi, Fabio

    ()

Abstract

Gatekeepers have an increasing role in taxation and regulation. While burdening them with legal liability for misconducts that benefit those who resort to their services actually discourages wrongdoings — as will be clarified in the paper — an alienation effect can also arise. That is, the gatekeeper might become more interested in covering up the illegal behavior and in cooperating with the perpetrator. Such perverse effects are difficult to detect and to measure. This paper studies the problem with respect to tax evasion by firms, by building upon the classical Allingham and Sandmo (1972) model and by providing a more detailed description of the "concealment costs" than that available in the literature, which often simply makes assumptions about their existence and their functional form. The relationship between a risk neutral firm owner aiming at evading taxes and a risk averse gatekeeper is described through a simple principal-agent framework. The paper highlights the role of legal rules pertaining to liability for tax evasion in shaping the parties choices, since concealment costs vary according to whether the risk neutral principal or the risk averse agent are held responsible when tax evasion is detected. The main result of the analysis is that there are simple conditions under which one can easily infer whether harnessing the agent is socially beneficial.

Suggested Citation

  • Biswas, Rongili & Marchese, Carla & Privileggi, Fabio, 2009. "Tax evasion in a principal-agent model with self-protection," POLIS Working Papers 138, Institute of Public Policy and Public Choice - POLIS.
  • Handle: RePEc:uca:ucapdv:138
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    File URL: http://polis.unipmn.it/pubbl/RePEc/uca/ucapdv/marchese158.pdf
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    References listed on IDEAS

    as
    1. Crocker, Keith J. & Slemrod, Joel, 2005. "Corporate tax evasion with agency costs," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1593-1610, September.
    2. Kong-Pin & C.Y. Cyrus Chu, 2005. "Internal Control versus External Manipulation: A Model of Corporate Income Tax Evasion," RAND Journal of Economics, The RAND Corporation, vol. 36(1), pages 151-164, Spring.
    3. Ehrlich, Isaac & Becker, Gary S, 1972. "Market Insurance, Self-Insurance, and Self-Protection," Journal of Political Economy, University of Chicago Press, vol. 80(4), pages 623-648, July-Aug..
    4. repec:ebl:ecbull:v:4:y:2005:i:6:p:1-8 is not listed on IDEAS
    5. Cassone, Alberto, 2009. "L'impatto economico dell'Universita' del Piemonte Orientale "Amedeo Avogadro": un aggiornamento al 2008," POLIS Working Papers 132, Institute of Public Policy and Public Choice - POLIS.
    6. 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.
    7. Sandmo, Agnar, 2005. "The Theory of Tax Evasion: A Retrospective View," National Tax Journal, National Tax Association, vol. 58(4), pages 643-663, December.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    tax evasion; firm; agency; risk aversion;

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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