Fraud Deterrence in Dynamic Mirrleesian Economies

46 Pages Posted: 12 Mar 2010 Last revised: 17 Feb 2011

See all articles by Roc Armenter

Roc Armenter

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Thomas M. Mertens

Federal Reserve Bank of San Francisco

Date Written: November 2, 2010

Abstract

Social and private insurance schemes rely on legal action to deter fraud and tax evasion. This observation guides the authors 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. The authors 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 savings. They characterize conditions such that the intertemporal wedge is negative in finite horizon economies. In an infinite horizon economy, the authors find that the constrained-efficient allocation converges to a high level of consumption, full insurance, and no labor distortions for any probability of state verification.

Suggested Citation

Armenter, Roc and Mertens, Thomas M., Fraud Deterrence in Dynamic Mirrleesian Economies (November 2, 2010). FRB of Philadelphia Working Paper No. 10-7. Available at SSRN: https://ssrn.com/abstract=1568292 or http://dx.doi.org/10.2139/ssrn.1568292

Roc Armenter (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Thomas M. Mertens

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

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