Corruptibility and Tax Evasion

Reduction of fiscal evasion may be pursued by introducing incentive schemes for tax inspectors. The aim of this paper is to explain the role of such bonuses in an economic environment with corruption, i.e. in a world where entrepreneurs and tax inspectors are open to bribery. In detail, we analyze the role of a public incentive scheme, where the tax inspector’s bargaining strength is endogenous with re- spect to an incentive mechanism: indeed the knowledge that even if an entrepreneur does not agree to pay the bribe, s/he can report tax evasion and be partly rewarded for this, increases the tax inspector’s bargaining strength.