A theory of strategic auditing: How should we select one member from a homogeneous group?

Yoshio Kamijo

No SDES-2014-1, Working Papers from Kochi University of Technology, School of Economics and Management

Abstract: This paper theoretically analyzes an audit rule that selects a taxpayer for an audit based on the reported income profile and creates strategic interdependence. Such strategic auditing contrasts with the random auditing rule. This paper proposes the lowest-reporter-audited rule. This rule ensures that the taxpayer with the lowest reported income is inspected from a group of taxpayers that are categorized according to factors such as social status, income level, occupation, and place of residence. We show that, under a realistic penalty rate condition, the lowest-reporter-audited rule is superior to the random audit rule.

Pages: 16 pages
Date: 2014-10, Revised 2014-10
New Economics Papers: this item is included in nep-acc and nep-mic
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Published in SDE Series, October 2014, pages 1-16

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