Research Papers in Economics, Department of Economics, Stockholm University
Tax Evasion: A Real Option Approach
Abstract: A theoretical model of excise tax evasion is developed in
this paper. The dynamics of a change in tax policy is derived, under the
assumption that consumers benefit from a lower price when entering a "black
market". However, entry also impose a sunk cost, which gives rise to
asymmetric effects and persistence effects on both aggregate demand and on
tax revenues. An increase in the tax rate instantaneously brings more
entrants into the black market, whereas a tax cut has no short-run effects
on the fraction of the population that has access to the black market.
Keywords: excise tax; real option; social norm; tax evasion; (follow links to similar papers)
JEL-Codes: H26; (follow links to similar papers)
26 pages, November 1, 1999
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