This paper presents a simple Overlapping Generation Model (OLG), augmented with Prospect Theory elements in the spirit of al-Nowaihi and Dhami (2007). The model tackle several open questions in the analysis of tax evasion and compliance decisions. In particular, the paper presents a new and complementary approach to address tax compliance decision in a OLG economy with behavioral components. Our main results are the following: there exists an equilibrium with a tax evasion level which can be coherent with the empirical estimates for the US economy; for our calibrations we find that the relationship between the tax rate and the evasion rate is a positive one (i.e., the model offers a solution to the Yitzhaki puzzle); we can highlight the role played in the context of tax evasion by an essential component of Prospect Theory, the framing effect, which was precluded to simple individual choice models.

Tax Evasion and Prospect Theory in a OLG Economy.

MARCHETTI, Enrico;BUSATO, Francesco;
2014

Abstract

This paper presents a simple Overlapping Generation Model (OLG), augmented with Prospect Theory elements in the spirit of al-Nowaihi and Dhami (2007). The model tackle several open questions in the analysis of tax evasion and compliance decisions. In particular, the paper presents a new and complementary approach to address tax compliance decision in a OLG economy with behavioral components. Our main results are the following: there exists an equilibrium with a tax evasion level which can be coherent with the empirical estimates for the US economy; for our calibrations we find that the relationship between the tax rate and the evasion rate is a positive one (i.e., the model offers a solution to the Yitzhaki puzzle); we can highlight the role played in the context of tax evasion by an essential component of Prospect Theory, the framing effect, which was precluded to simple individual choice models.
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11367/29716
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