Tax Compliance and Rank Dependent Expected Utility
Jean-Louis Arcand and
Grégoire Rota Graziosi
The Geneva Papers on Risk and Insurance Theory, 2005, vol. 30, issue 1, 57-69
Abstract:
Formulating the classic Allingham and Sandmo [1972] tax compliance problem under Rank Dependent Expected Utility (RDEU) provides a simple explanation for the “excess” level of full compliance observed in empirical studies, which standard Expected Utility (EU) theory is unable to explain. RDEU provides a compelling answer to this puzzle, without the need for the moral sentiments or stigma arguments that have recently been advanced in the literature. Formally, we show that the threshold audit probability or penalty rate at which full compliance becomes optimal for the decisionmaker are significantly lower under RDEU axiomatics than in the EU case, and that the optimal level of underreporting is lower under RDEU. Numerical simulations using various parameterizations of the probability weighting function illustrate the large quantitative differences between the two models, while a simulation of underreporting rates in the US over the past 50 years shows how RDEU can go some way towards explaining the tax-compliance puzzle. Copyright The Geneva Association 2005
Keywords: rank-dependent expected utility; tax-compliance (search for similar items in EconPapers)
Date: 2005
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)
Downloads: (external link)
http://hdl.handle.net/10.1007/s10836-005-1108-1 (text/html)
Access to full text is restricted to subscribers.
Related works:
Journal Article: Tax Compliance and Rank Dependent Expected Utility (2005) 
Working Paper: Tax Compliance and Rank-Dependent Expected Utility (2004) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:kap:geneva:v:30:y:2005:i:1:p:57-69
Ordering information: This journal article can be ordered from
http://www.springer.com/journal/10713
DOI: 10.1007/s10836-005-1108-1
Access Statistics for this article
The Geneva Papers on Risk and Insurance Theory is currently edited by Michael Hoy and Nicolas Treich
More articles in The Geneva Papers on Risk and Insurance Theory from Springer, International Association for the Study of Insurance Economics (The Geneva Association) Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().