Social Networks and Occupational Choice: The Endogenous Formation of Attitudes and Beliefs about Tax Compliance∗

The paper analyzes the emergence of group-specific attitudes and beliefs about tax com-pliance when individual interact in a social network. We assume taxpayers possess a range of individual characteristics — including attitude to risk, potential for success in self-employment, and the weight attached to the social custom for honesty — and make an occupational choice based on these characteristics. Occupations differ in the possi-bility for evading tax. The social network determines which taxpayers are linked, and information about auditing and compliance is transmitted at meetings between linked taxpayers. The analysis demonstrates how attitudes and beliefs endogenously emerge that differ across sub-groups of the population. Compliance behavior is different across occupational groups, and this is reinforced by the development of group-specific attitudes and beliefs. Taxpayers self-select into occupations according to the degree of risk aversion, the subjective probability of audit is sustained above the objective probability, and the weight attached to the social custom differs across occupations. These factors combine to lead to compliance level that differ across occupations