Zhang, Yuzhe; Ravikumar, B. - In: Theoretical Economics 7 (2012) 2, pp. 241-282
We study the optimal auditing of a taxpayer's income in a dynamic principal-agent model of hidden income. Taxpayers in our model initially have low income and stochastically transit to high income that is an absorbing state. A low-income taxpayer who transits to high income can under-report his...