A strategic approach for the crime
of tax evasion
Bruno Chiarini and Elisabetta Marzano
Department of Economics and Legal Studies,
Universita degli Studi di Napoli Parthenope, Napoli, Italy
Purpose –Crime games cannot be simply read with mixedstrategies. These strategies are inconclusive of
how the playersact rationally. This is undeniably true for the crime of tax evasion, wheredishonest taxpayers
are rational agents, motivated by the comparisonof payoffs, when considering the risk of non-compliance.
The purpose of this paperis to illustrate that in the presence of a small “private disturbance”of the players’
payoff, the Nash equilibrium in mixedstrategies provides us with the necessary information on equilibria in
pure strategiesthat will be played.
Design/methodology/approach –In tax-evasiongames, an equilibrium must necessarily be interpreted
in pure strategies, and the only way to do this is to insert some private information into the game and
reinterpretit in a Bayesian scheme. We show that taxpayers’private,subjectiveconsiderations on the effective
implementation of the penalty and the revenue agency’s private information on the cost of monitoringand
convictioncan lead to Bayesian equilibria in pure strategies.The present paper takes issue with this Bayesian
equilibriumand the implications for comparative-statics results.
Findings –In this context, toughersentencing deters crime, although, as the Italian experienceteaches, the
necessary condition required is thecertainty of punishment and the ability of the government to enforce it.
The equilibrium strategieswith incomplete information reveal whether it is convenient forthe two agents to
maintain their “privatedisturbance”as private information or, on the contrary, it is convenientto expect it to
Originality/value –A distinct set of studies has adopteda game theoretic approach and showsthat the
standard economic approach to crime deterrence inspired by Gary Beker’s seminal paper might be ﬂawed.
See, among others, Saha and Poole (2000), Tsebelis (1989) and Andreozzi (2010). This paper shows that a
greater severity of the penaltyand a higher certainty of punishment (a lower possibility of appealingagainst
sanctions and no discounts on due penalties) necessarily lead to a unique Bayesian equilibrium without
Keywords Tax evasion, Private information, Deterrence, Crime game, Mixed strategies
Paper type Research paper
The severity of sentencing as an instrument to deter crime has long been discussed. The
debate is often related to different contexts, crimes and legislation, such that it becomes
difﬁcult to ascertainwhether an increase in the penalty or sanction can produce a sufﬁcient
deterrent to limit the crime. Deterrence is based on the premise that humans are “rational”
beings, able to measure the advantages and disadvantages of their actions. As a result, the
pain of punishment must be equal to or greater than the beneﬁts of crime to deter the
individual fromchoosing to break the law. This is the economic approach to crime behavior
(see, amongothers, Cook et al., 2013). In this context,the taxpayers’decision to evadetaxes
or otherwise is rationally taken and planned, possibly with their accountants or business
consultants, taking costs and beneﬁts into consideration (Allingham and Sandmo, 1972).
This perspective leads naturally to a presumption of deterrability –that crime rates will be
inversely related to the likelihood and severity of punishment. In this case, the strategic
Crime of tax
Journalof Financial Crime
Vol.26 No. 2, 2019
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