Prospect Theory and Tax Evasion: A Reconsideration of the Yitzhaki Puzzle (Reloaded)

Tax Administration Research Centre (TARC)

Speaker:Matthew Rablen, Brunel University
Date: Friday 21 November 2014
Time: 14.30
Location: Streatham Court D

Further details

The standard expected utility (EUT) model of tax evasion predicts that evasion is decreasing in the marginal tax rate (the Yitzhaki puzzle). Recent literature shows cases in which incorporating prospect theory (PT) overturns the Puzzle. With a more general Taxpayer Behavioural Model, nesting PT and EUT preferences, we provide a detailed study of how the elements of PT affect the Puzzle. The most common specifications of PT in the literature do not reverse the Puzzle. More generally, even allowing for stigma and/or variable audit probability, PT does not decisively improve prediction in respect of the Puzzle over EUT.

Matthew Rablen is a Senior Lecturer in Economics at Brunel University.

Matthew's major research interest is in public economics and his publications include papers in the Economic Journal, the Journal of Health Economics, the Journal of Public Economic Theory, and the Journal of Economic Psychology.