Financial Contracting with Tax Evaders

Philipp Meyer-Brauns

VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy from Verein für Socialpolitik / German Economic Association

Abstract: This paper derives the optimal financial contract when a borrowing entrepreneur can evade taxes in a model of costly state verification. In contrast to previous literature on costly state verification and financial contracting, we find that standard debt contracts are not optimal when tax evasion is possible. Instead, the optimal contract is debt-like only for very low and very high profit realizations, and features a constant repayment and verification of returns in an intermediate range. This occurs because the entrepreneur has to be given a positive rent even under verification in order to not abuse her limited liability protection for excessive tax evasion activities.

JEL-codes: D82 G30 H26 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-cta, nep-iue and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc14:100524

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