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Explicating Corruption and Tax Evasion:Reflections on Greek Tragedy

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Abstract

Do developed countries experience extensive corruption and if so how should they treat it? Evidence from countries in which tax evasion and various forms of corruption coexist and interact (e.g. Greece) indicates that the answer is positive. We address this problem by constructing an overlapping generations model com- prising two distinct groups of agents, citizens and politicians. Citizens decide the fraction of their income that they report to the tax authorities. Politicians decide the fraction of the public budget that they peculate. In such a context, multiple self-ful?lling equilibria can emerge: a "good"("bad") equilibrium with low (high) corruption and high (low) level of spending on education. It is shown that standard deterrence policies (e.g., fines) cannot eliminate multiplicity. Interestingly, whenever corruption may corrupt, policies that impose a strong moral cost on tax evaders and corrupt politicians can lead to a unique equilibrium.

Suggested Citation

  • Anastasia Litina & Theodore Palivos, 2011. "Explicating Corruption and Tax Evasion:Reflections on Greek Tragedy," Discussion Paper Series 2011_07, Department of Economics, University of Macedonia, revised May 2011.
    • Handle: RePEc:mcd:mcddps:2011_07
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    Cited by:

    1. Spyridon Boikos, 2016. "Corruption, Public Expenditure and Human Capital Accumulation," Review of Economic Analysis, Digital Initiatives at the University of Waterloo Library, vol. 8(1), pages 17-45, June.
    2. Athanasios Lapatinas & Anastasia Litina & Eftichios Sophocles Sartzetakis, 2014. "Is Abatement Effective in the Presence of Corruption? A Theoretical Exploration," DEM Discussion Paper Series 14-29, Department of Economics at the University of Luxembourg.

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    More about this item

    Keywords

    Corruption; Tax Evasion; Multiple Equilibria; Stigma.;
    All these keywords.

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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