Public Good Provision : A Tale of Tax Evasion and Corruption

Anwar, Chowdhury Mohammad Sakib and Matros, Alexander and Sen Gupta, Sonali (2020) Public Good Provision : A Tale of Tax Evasion and Corruption. Working Paper. Lancaster University, Department of Economics, Lancaster.

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Abstract

We develop a model that links tax evasion, corruption, and public good provision. In our model, citizens pay or evade taxes into the public fund, which a corrupt governor redistributes. Each citizen forms expectations about the amount of public goods the governor should provide. After observing the actual level of public goods, a citizen punishes the governor if this level is below his expectations. We describe three types of equilibria: tax evasion, efficient public good provision, and symmetric mixed-strategy. We show that the highest expectations can lead to no free riding (tax evasion) and the efficient level of public good provision even with the corrupt governor and without punishment for tax evasion.