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Income tax compliance in a principal-agent framework

Reinganum, Jennifer F. (1985) Income tax compliance in a principal-agent framework. Journal of Public Economics, 26 (1). pp. 1-18. ISSN 0047-2727. doi:10.1016/0047-2727(85)90035-0.

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Previous analyses have modeled income tax evasion as a ‘portfolio problem’, deriving the optimal consumption of the ‘risky asset’ (unreported income) assuming a fixed probability of detection. We compare an alternative audit policy to the standard random audit policy. We focus on an ‘audit cutoff’ policy, in which an agent triggers an audit if reported income is ‘too low’, and is not audited if reported income is ‘sufficiently high’. We find that random audit rules are weakly dominated by audit cutoff rules. Given lump-sum taxes and fines, audit cutoff rules are the least-cost policies which induce truthful reporting of income.

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Additional Information:© 1985 Elsevier B.V. Received August 1983, revised version received July 1984. We would like to thank Kim Border, Tracy Lewis, Joel Sobel, Jeff Strnad, Rob Townsend, members of the Caltech Theory Workshop and two anonymous referees for helpful suggestions and discussion. Michael Graetz was instrumental in stimulating our interest in this topic. Formerly SSWP 477.
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:83238
Deposited By: Jacquelyn Bussone
Deposited On:15 Nov 2017 23:39
Last Modified:15 Nov 2021 19:56

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