Network-Based Policies Versus Tax Evasion



This chapter explores the optimal income tax audit strategies from a social planner’s perspective, whose objective is to minimize the aggregated tax evasion of a given society. Agents live in a social-cohesive network with homophilic linkages, meaning individuals connect only with people who are akin to them. Further, each period individuals share their memories about past audits and consequently update their subjective probability of being audited. The Tax Agency finds that network-based audit policies are inefficient, in the sense that they are just as good as random. Thus, the social planner credibly announces that, from now on, audit rates will be linearly proportionate to the agent’s income, making richer people more prone of being audited. Audit rates are now endogenous and heterogeneous among agents, making it possible for the Tax Agency to find an optimal network-based policy following a local-average strategy where a “key sector” of society is predominantly audited every period. Following this strategy, under a dynamic framework, the Nash Equilibrium for the average subjective audit rate is swiftly raised after just a few fiscal years. The enhanced subjective audit rate, in turn, unfolds as a larger tax revenue collection and a significant deterrence of income tax evasion.


AB models Networks Quantitative policy Tax evasion 

JEL Classification:

C54 D85 H26 


  1. Allingham MG, Sandmo A (1972) Income tax evasion: a theoretical analysis. J Public Econ 1(3–4):323–338CrossRefGoogle Scholar
  2. Alm J, Bloomquist KM, McKee M (2017) When you know your neigh- bour pays taxes: information, peer effects, and tax compliance (Working Paper Series No. 6775). Victoria University of Wellington, Chair in Public FinanceGoogle Scholar
  3. Andrei AL, Comer K, Koehler M (2014) An agent-based model of network effects on tax compliance and evasion. J Econ Psychol 40(C):119–133Google Scholar
  4. Ballester C, Calvó-Armengol A, Zenou Y (2006) Who’s who in networks. Wanted: The key player. Econometrica 74(5):1403–1417Google Scholar
  5. Becker GS (1968) Crime and punishment: an economic approach. J Polit Econ 76:169CrossRefGoogle Scholar
  6. Billari F, Diaz BA, Fent T, Prskawetz A (2007) The “wedding-ring”. Demogr Res 17(3):59–82CrossRefGoogle Scholar
  7. Bonacich P (1987) Power and centrality: a family of measures. Am J Sociol 92:1170–1182CrossRefGoogle Scholar
  8. Garcia Alvarado F (2019) Network effects in an agent-based model of tax evasion with social influence. In: Demazeau Y, Matson E, Corchado JM, de la Prieta F (eds) Advances in practical applications of survivable agents and multi- agent systems (chap. Forthcoming). Springer LNAIGoogle Scholar
  9. Hokamp S, Pickhardt M (2010) Income tax evasion in a society of heterogeneous agents—evidence from an agent-based model. Int Econ J 24(4):541–553CrossRefGoogle Scholar
  10. Korobow A, Johnson C, Axtell R (2007) An agent-based model of tax compliance with social networks. Natl Tax J 60(3):589–610CrossRefGoogle Scholar
  11. Luttmer EFP, Singhal M (2014) Tax morale. J Econ Perspect 28(4):149–168CrossRefGoogle Scholar
  12. Mittone L (2006) Dynamic behaviour in tax evasion: an experimental approach. J Behav Exp Econ (formerly The Journal of Socio-Economics) 35(5):813–835Google Scholar
  13. Mittone L, Patelli P (2000) Imitative behaviour in tax evasion (Economic simulations in swarm: agent-based modelling and object oriented programming)Google Scholar
  14. Myles G, Naylor R (1996) A model of tax evasion with group conformity and social customs. Eur J Polit Econ 12(1):49–66CrossRefGoogle Scholar
  15. Patacchini E, Zenou Y (2012) Juvenile delinquency and conformism. J Law Econ Organ 28(1):1–31CrossRefGoogle Scholar
  16. Tversky A, Kahneman D (1973) Availability: a heuristic for judging frequency and probability. Cogn Psychol 5:207–232CrossRefGoogle Scholar
  17. Ushchev P, Zenou Y (2018) Social norms in networks. SSRN Electron JGoogle Scholar

Copyright information

© Springer Nature Singapore Pte Ltd. 2019

Authors and Affiliations

  1. 1.Ca’ Foscari University of VeniceVeniceItaly
  2. 2.University of Paris 1 Pantheon-SorbonneParisFrance

Personalised recommendations