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Dimensional traps in evasion models and their effects on industrial structure

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  • Coppier, Raffaella
  • Michetti, Elisabetta
  • Scaccia, Luisa

Abstract

Size-dependent firms’ monitoring by the state leads to sub-optimal results in terms of combating evasion and efficient allocation of investment by firms. While Coppier, Michetti and Scaccia (2022) describe how such a policy can be a source of dimensional trap in a single-firm evasion model, the present paper moves to a heterogeneous context, considering industrial structures composed of many firms with different sizes. We then propose a discrete-time nondeterministic dynamic model to describe the consequences of size-dependent policies and potential dimensional traps on industrial structure and its evolution over time. We show that an unwise choice of policy parameters may determine a long-run equilibrium industrial structure characterized by a small number of large firms and a plethora of small firms, with the latter being marked by inefficient resource allocation and noncompliant behavior with regard to tax regulations. These results are robust to different choices of the initial industrial structure suggesting alternative policy indications.

Suggested Citation

  • Coppier, Raffaella & Michetti, Elisabetta & Scaccia, Luisa, 2024. "Dimensional traps in evasion models and their effects on industrial structure," Economic Modelling, Elsevier, vol. 132(C).
    • Handle: RePEc:eee:ecmode:v:132:y:2024:i:c:s0264999324000038
    DOI: 10.1016/j.econmod.2024.106647
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    References listed on IDEAS

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    More about this item

    Keywords

    Tax evasion; Dimensional trap; Size-dependent enforcement; Industrial structure; Mathematical and statistical methods;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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