The Hidden Costs of Tax Evasion: Collaborative Tax Evasion in Markets for Expert Services

42 Pages Posted: 8 Jun 2015

See all articles by Loukas Balafoutas

Loukas Balafoutas

University of Innsbruck

Adrian Beck

University of Innsbruck

Rudolf Kerschbamer

University of Innsbruck; Centre for Economic Policy Research (CEPR)

Matthias Sutter

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods; University of Cologne - Department of Economics

Abstract

We experimentally examine the impact of tax evasion attempts on the performance of credence goods markets, where contractual incompleteness results from asymmetric information on the welfare maximizing quality of the good. Our results suggest that tax evasion attempts – independently of whether they are successful or not – lead to efficiency losses in the form of too low quality and less frequent trade. Thus, shadow economies may reduce welfare not only by inducing agents to incur costs to hide or to uncover taxable transactions, by imposing risk on risk-averse tax evaders and by distorting competition, but also by creating an additional efficiency loss in the underlying market by forfeiting possible gains from trade and by inducing insufficient quality provision. We call this the hidden costs of tax evasion.

Keywords: tax evasion, expert services, credence goods, fraud, experiment

JEL Classification: C72, C91, D82, H26

Suggested Citation

Balafoutas, Loukas and Beck, Adrian and Kerschbamer, Rudolf and Sutter, Matthias, The Hidden Costs of Tax Evasion: Collaborative Tax Evasion in Markets for Expert Services. IZA Discussion Paper No. 9085. Available at SSRN: https://ssrn.com/abstract=2615249

Loukas Balafoutas (Contact Author)

University of Innsbruck ( email )

Universitätsstraße 15
Innsbruck, Innsbruck 6020
Austria

Adrian Beck

University of Innsbruck ( email )

Universitätsstraße 15
Innsbruck, Innsbruck 6020
Austria

Rudolf Kerschbamer

University of Innsbruck ( email )

Universitaetsstrasse 15
Innsbruck, A - 6020
Austria
+43 512 507 7400 (Phone)
+43 512 507 2980 (Fax)

HOME PAGE: http://www.uibk.ac.at/c/c4/c409/staff/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Matthias Sutter

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

University of Cologne - Department of Economics

Cologne, 50923
Germany

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