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Raghunathan appointed director of Survey Research Center

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Kusunoki wins faculty seed grant award from Institute for Research on Women and Gender

2014 PAA Annual Meeting, May 1-3, Boston

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Monday, April 21
Grant Miller: Managerial Incentives in Public Service Delivery

Internal Control and External Manipulation: A Model of Corporate Income Tax Evasion

Publication Abstract

Chen, Kong-pin, and C. Y. Cyrus Chu. 2005. "Internal Control and External Manipulation: A Model of Corporate Income Tax Evasion." RAND Journal of Economics, 36(1): 151-164.

We offer a formal model of corporate income tax evasion. While individual tax evasion is essentially a portfolio-selection problem, corporate income tax evasion is much more complicated. When the owner of a firm decides to evade taxes, not only does she risk being detected by the tax authorities, more importantly, the optimal compensation scheme offered to the employees will also be altered. Specifically, due to the illegal nature of tax evasion, the contract offered to the manager is necessarily incomplete. This creates a distortion in the manager's effort and reduces the efficiency of the contract. Tax evasion thus increases the profit retained by the firm not only at the risk of being detected, but also at the cost of efficiency loss in internal control.

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