April 2009

IZA DP No. 4153: Why Pay Taxes When No One Else Does?

published in: Review of Development Economics, 2010, 14 (2), 374-385

In this paper we try to understand the phenomena whereby a large proportion of the population evades tax payments. We present a model which incorporates elements from the theory of information cascades with the standard model of tax evasion and analyze the connection between the decision of a potential tax evader, the number of tax evaders and the number caught in previous periods. General conditions exist under which any expected utility maximizing tax evaders will decide to emulate other tax evaders.