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Evolutionary Tax Evasion and Optimal Regulation

Author

Listed:
  • Domenico De Giovanni
  • Fabio Lamantia
  • Mario Pezzino

Abstract

We study the dynamics of compliance in a population of agents that decide whether to engage in tax evasion depending on an evolutionary adaptation process. We model taxpayers’ preferences by means of Prospect Theory. We also consider an optimal control problem to study the longrun level of tax evasion when a tax authority targets the maximization of the expected stream of tax revenues choosing auditing effort. The analysis provides conditions for the evolution of tax evasion to converge to an asymptotically stable interior equilibrium. Moreover, the study of the intertemporal optimal auditing produces novel and rich results, including the existence of multiple equilibria and discontinuities in the optimal control.

Suggested Citation

  • Domenico De Giovanni & Fabio Lamantia & Mario Pezzino, 2018. "Evolutionary Tax Evasion and Optimal Regulation," Economics Discussion Paper Series 1814, Economics, The University of Manchester.
    • Handle: RePEc:man:sespap:1814
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    File URL: http://hummedia.manchester.ac.uk/schools/soss/economics/discussionpapers/EDP-1814.pdf
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • 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
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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