Tax Evasion and Dynamic Inefficiency

I show within a two-period overlapping generations model with income tax evasion that when the penalty rate set by the government is su¢ ciently small, it is theoretically possible for the capital stock to exceed the golden-rule level on the balanced-growth path. However, such a dynamic inefficiency cannot be guaranteed when the probability of evasion detection is nil.

Distributive Concerns in the Bankruptcy Problem with an Endogenous Estate

We compare certain bankruptcy rules in a bankruptcy model with an endogenous estate on the basis of normative criteria. In particular, five properties related to distributive concerns are analyzed: minimal rights first, securement of initial investments, initial investments first, reasonable lower bounds on awards, and reasonable lower bounds on losses. The proportional rule receives the strongest support from this normative analysis among the rules considered. We also observe that the performance of the proportional rule improves in the family of bankruptcy problems with endogenous estates compared to the general set of bankruptcy problems. Our results complement those in Karagozoglu (2008) and provide a broader perspective to bankruptcy problems with endogenous estates.public economics ;

A Noncooperative Approach to Bankruptcy Problems with an Endogenous Estate

We introduce a new class of bankruptcy problems in which the value of the estate is endogenous and depends on agents'' investment decisions. There are two investment alternatives: investing in a company and becoming a shareholder (risky asset) and depositing money into a savings account (risk-free asset). Bankruptcy is a possible event only for the risky asset. We define a game between agents each of which aims to maximize his expected payoff by choosing an investment alternative and a company management which aims to maximize profits by choosing a bankruptcy rule. There are two types of agents in our basic model, who are differentiated by their incomes. We, first, consider three well-known bankruptcy rules: the proportional rule, the constrained equal awards rule and the constrained equal losses rule. We show that there always exists a pure strategy subgame perfect Nash equilibrium, which involves the proportional rule. This result is independent of the income distribution in the economy and holds even under one-sided uncertainty on the income distribution. Moreover, if the company optimally chooses the return rate to be paid to investors, the unique subgame perfect Nash equilibrium involves the proportional rule. We also extend our model in two dimensions: (i) to a larger set of rules containing the Talmud rule and (ii) to two companies competing over potential investors.Economics (Jel: A)