Social Interaction in Tax Evasion

Lipatov, Vilen (2008): Social Interaction in Tax Evasion.

Abstract

We analyze the tax evasion problem with social interaction among the taxpayers. If the authority commits to a fixed auditing probability, a positive share of cheating is obtained in equilibrium. This stands in contrast to the existing literature, which yields full compliance of audited taxpayers who are rational and thus do not need to interact. When the authority adjusts the auditing probability every period, cycling in cheating-auditing occurs. Thus, the real life phenomenon of compliance fluctuations is explained within the model rather than by exogenous parameter shifts. Our analysis can also be applied to crime, safety regulations, employment and environmental protection, as well as other compliance problems.

• Item Type: MPRA Paper
• Language: English
• Keywords: tax evasion, learning, social interaction, behavioral rule, compliance
• Subjects: C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C79 - Other; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search ; Learning ; Information and Knowledge ; Communication ; Belief ; Unawareness; K - Law and Economics > K4 - Legal Procedure, the Legal System, and Illegal Behavior > K42 - Illegal Behavior and the Enforcement of Law; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H26 - Tax Evasion and Avoidance

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