Corruption, Tax Evasion and Social Values

We provide empirical support and a theoretical explanation for the vicious circle of political corruption and tax evasion in which countries often fall into. We address this issue in the context of a model with two distinct groups of agents: citizens and politicians. Citizens decide the fraction of their income for which they evade taxes. Politicians decide the fraction of the public budget that they peculate. We show that multiple self-ful\u85lling equilibria with di¤erent levels of corruption can emerge based on the existence of strategic complementarities, indicating that corruption may corrupt. Furthermore, we \u85nd that standard deterrence policies cannot elimi-nate multiplicity. Instead, policies that impose a strong moral cost on tax evaders and corrupt politicians can lead to a unique equilibrium. JEL Classi\u85cation: D73; E62; H2