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Explicating Corruption and Tax Evasion:Reflections on Greek Tragedy

Anastasia Litina () and Theodore Palivos

Discussion Paper Series from Department of Economics, University of Macedonia

Abstract: Do developed countries experience extensive corruption and if so how should they treat it? Evidence from countries in which tax evasion and various forms of corruption coexist and interact (e.g. Greece) indicates that the answer is positive. We address this problem by constructing an overlapping generations model com- prising two distinct groups of agents, citizens and politicians. Citizens decide the fraction of their income that they report to the tax authorities. Politicians decide the fraction of the public budget that they peculate. In such a context, multiple self-ful?lling equilibria can emerge: a "good"("bad") equilibrium with low (high) corruption and high (low) level of spending on education. It is shown that standard deterrence policies (e.g., fines) cannot eliminate multiplicity. Interestingly, whenever corruption may corrupt, policies that impose a strong moral cost on tax evaders and corrupt politicians can lead to a unique equilibrium.

Keywords: Corruption; Tax Evasion; Multiple Equilibria; Stigma. (search for similar items in EconPapers)
JEL-codes: D73 E62 H26 (search for similar items in EconPapers)
Date: 2011-05, Revised 2011-05
New Economics Papers: this item is included in nep-acc, nep-dge, nep-pol and nep-pub
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