Sanchez-Villalba, Miguel (2006) Anti-evasion auditing policy in the presence of common income shocks. DARP, 80. Suntory and Toyota International Centres for Economics and Related Disciplines, London School of Economics and Political Science, London, UK.
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When fairly homogeneous taxpayers are affected by common income shocks, a tax agency’s optimal auditing strategy consists of auditing a low-income declarer with a probability that (weakly) increases with the other taxpayers’ declarations. Such policy generates a coordination game among taxpayers, who then face both strategic uncertainty - about the equilibrium that will be selected.and fundamental uncertainty - about the type of agency they face. Thus the situation can be realistically modelled as a global game that yields a unique and usually interior equilibrium which is consistent with empirical evidence. Results are also applicable to other areas like regulation or welfare benefit allocation.
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