Monday Afternoon Seminar: Bribes vs. Taxes: Market Structure and IncentivesISER External Seminars

Firms in developing countries often avoid paying taxes by engaging in informal agreements
with business tax inspectors. These informal payments or bribes increase the cost of operating
a business, and the price charged to consumers. In order to decrease these costs, we
designed an incentive scheme for business tax inspectors that rewards them according to
the anonymous evaluation submitted by inspected firms. In our theoretical model, firm heterogeneity
and market structure determine firms’ willingness to pay bribes while incentives
shape the behavior of inspectors along both the extensive and intensive margin. An incentive
scheme that rewards inspectors according to the average evaluation of firms makes
bigger firms more attractive for inspectors, restricting the equilibrium set of inspected firms
and changing their average characteristics. A tilted scheme that attaches more weight to the
evaluation of smaller firms discourages targeting of bigger firms and decreases the size of
bribes. We evaluate both schemes with a randomized controlled trial in the Kyrgyz Republic,
and find evidence that is consistent with the model’s prediction. By decreasing bribes,
our intervention reduces the average cost for firms and the price they charge to consumers.
Tax revenues do not change significantly. Our study highlights the role of firm heterogeneity
and market structure in shaping incentives for business tax inspectors while providing
clear evidence of pass-through of bribes to consumers.

Presented by:

Giacomo De Giorgi, GSEM, University of Geneva

Date & time:

2 Oct 2017 15:00 pm - 2 Oct 2017 16:30 pm


ISER Large Seminar Room, 2N2 4.16

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