Chang, Lai and Chang (1999) use a micro-founded short-term macroeconomic model, with an imperfectly competitive market, to analyze, among other issues, the relationship between tax evasion and tax revenue. They show that this relationship depends upon the market structure. In particular, when...

Since <link rid="b31">Sandmo (1981)</link>, many articles have analyzed optimal fiscal policies in economies with tax evasion. All share a feature: they assume that the cost of enforcing the tax law is exogenous. However, governments often invest resources to reduce these enforcement costs. In a very simple model, we...

We examine the problem of a utilitarian government that sets taxes and fines for evaders but cannot commit to any enforcement policy. Given the tax law, the government and taxpayers —some of whom are honest— play a report-audit game that, depending on taxes, fines and audit costs, generates...

We analyze a Principal-Agent model of an insurer who faces an adverse selection problem. He is unable to observe if his client has a high risk or a low risk of having an accident. At the underwriting of the contract, the insurer requests the client to declare his risk. After that, the former can...

This article analyses hard and soft budget constraints in a federation, where there is a moral hazard problem between the central and the regional governments. Regional governments can avoid a bailout from the center by exerting costly effort. In this setting, a hard budget constraint is not...

We analyze the relation between tax enforcement, aggregate output and government revenue when imperfectly competitive firms evade a specific output tax. We show that aggregate output decreases with tax enforcement. Government revenue increases with enforcement when the tax is low. When the tax...

The objective of this paper is to understand the determinants of the enforcement level of indirect taxation in a positive setting. We build a sequential game where individuals differing in their willingness to pay for a taxed good vote over the enforcement level. Firms then compete à la Cournot...

Most of the contributions to the optimal tax-enforcement literature assume that audits are perfect and always discover evaders. However, evasion often remains undetected. To reduce the probability of such a failure, governments invest resources to improve their tax administrations’ detection...