Tax evasion and Prospect Theory in a OLG economy

Francesco Busato and Francesco Giuli
Authors registered in the RePEc Author Service: Enrico Marchetti

No 196, Departmental Working Papers of Economics - University 'Roma Tre' from Department of Economics - University Roma Tre

Abstract: This paper presents a simple Overlapping Generation Model (OLG), aug-mented with Prospect Theory elements in the spirit of al-Nowaihi and Dhami (2007). Themodel 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 ¯nd 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.

Keywords: Tax evasion; OLG models; Prospect theory (search for similar items in EconPapers)
JEL-codes: D03 D81 E21 (search for similar items in EconPapers)
Date: 2014-11
New Economics Papers: this item is included in nep-dge, nep-iue, nep-mac, nep-pbe, nep-pub and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:rtr:wpaper:0196

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