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WHY PEOPLE TOLERATE UNDERGROUND ECONOMY AND TAX EVASION?

Gerasimos T. Soldatos
Giornale degli Economisti e Annali di Economia
Nuova Serie, Anno 54, No. 10/12 (Ottobre-Dicembre 1995), pp. 621-633
Published by: EGEA SpA
Stable URL: http://www.jstor.org/stable/23247818
Page Count: 13
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WHY PEOPLE TOLERATE UNDERGROUND ECONOMY AND TAX EVASION?
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Abstract

The absence of complete effectiveness in the campaign against underground economy and tax evasion implies within the context of the prisoner's dilemma modeling of the citizen response to jointly produce a public good, that the law abiding citizen is fooled out of his money by those who cheat the State. Using game theory, it is argued that the law abiding the citizen tolerates this situation because he is compensated through his interaction with the unlawful citizens in the private goods market. Next, by assuming that agents maximize the intertemporal utility of the certain equivalent of the official and (the uncertain) "underground" consumption, the author concludes that either the cheating of the State or the tolerance of this act does not imply risk loveliness: all agents are found to be risk averse, because they want tomorrow more than today. Yet, the unlawful citizen's behavior is characterized by the so-called "preference reversal phenomenon". The same holds for the government whenever it does not arrest someone known to have broken the law.

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