The Fiscal Alibi: Hidden Spending Needs and Government Reputation

Georgy Lukyanov and Hengrina Ly

Papers from arXiv.org

Abstract: A government may ask for a high tax because it faces a genuine expense. The same demand can also be made by a government that intends to keep the proceeds. We study this ambiguity in a two-period reputation model with privately observed spending needs and an endogenous tax base. The opportunist chooses between outright confiscation and levies that an honest government might impose. We characterize the three possible regimes through a single equilibrium equation. A mean-preserving spread of legitimate needs weakly raises the opportunist's lifetime value, with a strict increase precisely when the spread changes the upper tail relevant for mimicry. We then give a necessary and sufficient curvature condition for this ordering to extend to a general reputational continuation prize. Verification reduces the value of concealment, but also changes how the opportunist extracts. In the benchmark economy, greater auditing weakly lowers current citizen welfare, even before audit costs, while improving the future allocation through better information. The welfare case for verification consequently depends on the balance between these two effects. Examples yield no auditing, an optimum within a regime, and an optimum at the boundary between regimes.

Date: 2026-09
References: Add references at CitEc
Citations:

Downloads: (external link)
https://arxiv.org/pdf/2609.25072 Latest version (application/pdf)

Related works:
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:arx:papers:2609.25072

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().