Institutions and Customs Duty Evasion

Tariff receipts are important for many countries but their collection is often problematic. To analyze why and to what extent this occurs we first model customs duty evasion as an interaction between customs officers considered to be corruptible law enforcers, and importing firms. In this context, higher tariffs generally lead to greater customs duty evasion but their marginal impact is decreasing, and may turn negative above a given threshold if customs officers adapt their inspection effort endogenously. While transparency (the probability of effective control) always limits evasion, we show that ease of enforcement (e.g. ease of establishing the shipment`s true value) matters only if customs officers do not collude with importers. Our empirical analysis spans 55 importing countries over the period 2001-2010 and confirms our predictions. This lends support to the assumptions of endogenous inspection effort and widespread collusion. World Trade Organization membership is found also to limit the extent of duty evasion.