Decentralized Deterrence, with an Application to Labor Tax Auditing

Nicolas Sahuguet, Nicola Persico and Edoardo Di Porto

No 8901, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Deterrence of illegal activities is frequently carried out by many atomistic auditors (tax auditors, law enforcement agents, etc.). Not much is known either normatively about the best way to incentivize atomistic auditors, nor positively about what these incentives actually look like in real world organizations. This paper focuses almost exclusively on the positive question. It proposes a game-theoretic model of decentralized deterrence and an empirical test, based on the equilibrium of the model, to identify the incentives of individual auditors. In the special (but important) case of tax enforcement, the paper fully characterizes the equilibrium of a strategic auditing game and provides a method to calibrate its parameters based on audit data. Applying the model and method to Italian auditing data provides ?proof of concept?: the methods are practical and tractable. We are able to provide an estimate of tax evasion based on (non-random) audit data alone. Counterfactual simulation of the model quantifies the costs and benefits of alternative auditing policies. We compare decentralized enforcement with a counterfactual commitment policy, and compute the loss from the former. Thus we are able to quantify the costs of decentralizing enforcement.

Keywords: Audits; Deterrence; Tax evasion (search for similar items in EconPapers)
JEL-codes: H26 H83 K42 (search for similar items in EconPapers)
Date: 2012-03
New Economics Papers: this item is included in nep-acc, nep-cmp and nep-iue
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Decentralized Deterrence, with an Application to Labor Tax Auditing (2013)
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