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DARP Paper
Anti-evasion auditing policy in the presence of common income shocks
Miguel Sanchez
February 2006
Paper No' DARP 080:
Full Paper (pdf)

JEL Classification: H26; D82; D84; C72

Tags: keywords: tax evasion; coordination; global games; expectations; asymmetric information

When fairly homogeneous taxpayers are affected by common income shocks, a tax agency’s optimal auditing strategy consists of auditing a low-income declarer with a probability that (weakly) increases with the other taxpayers’ declarations. Such policy generates a coordination game among taxpayers, who then face both strategic uncertainty - about the equilibrium that will be selected.and fundamental uncertainty - about the type of agency they face. Thus the situation can be realistically modelled as a global game that yields a unique and usually interior equilibrium which is consistent with empirical evidence. Results are also applicable to other areas like regulation or welfare benefit allocation.