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Misreporting, Retroactive Audit and Redistribution

By Sandrine Spaeter and Marc Willinger

Abstract

In this paper, we investigate an audit policy that allows a regulator to control past declarations of an agent who is caught to fraud in the current period or to adopt an action that is not desirable for Society. Coupled with redistribution effects due to the production of a public good, we show that retroactivity has not always the desired effect on the level of evasion or the level of effort, once the agent has decided to deviate from a given objective. Nevertheless, we derive conditions under which retroactivity lessens fraudulent behaviors, in quantity and in value. As a related result, authorities should communicate about how they use the individual contributions but information should not be completely transparent in order to fight efficiently against deviation. Redistribution and retroactivity may have opposite effects on the behavior of the agent when combined together.

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