Fraud Deterrence in Dynamic Mirrleesian Economies

Thomas Mertens and Roc Armenter ()
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Thomas Mertens: NYU Stern

No 468, 2010 Meeting Papers from Society for Economic Dynamics

Abstract: Social and private insurance schemes rely on legal action to deter fraud and tax evasion. This observation guides us to introduce a random state-verification technology in a dynamic economy with private information. With some probability, an agent's skill level becomes known to the planner who prescribes a punishment if the agent is caught misreporting. We show how deferring consumption can ease the provision of incentives. As a result, the marginal benefit may be below the marginal cost of investment in the constrained efficient allocation suggesting a subsidy on capital. We characterize conditions such that the intertemporal wedge is negative in finite horizon economies. In an infinite-horizon economy, we find that the constrained efficient allocation converges to a high level of consumption, full insurance, and no labor distortions for any probablity of state-verification.

Date: 2010
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Related works:
Journal Article: Fraud deterrence in dynamic Mirrleesian economies (2013)
Working Paper: Fraud deterrence in dynamic Mirrleesian economies (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed010:468

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