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dc.contributor.authorDhami, Sanjit-
dc.contributor.authoral-Nowaihi, Ali-
dc.description.abstractGiven actual probabilities of audit and penalty rates observed in the real world, tax evasion should be an extremely attractive gamble to an expected utility maximizer. However, in practice, one observes too much compliance relative to the predictions of expected utility. This paper considers an alternative theoretical model that is based on Kahneman and Tversky's cumulative prospect theory. The model predicts empirically plausible magnitudes of tax evasion despite low audit probabilities and penalty rates. An increase in the tax rate leads to an increase in the amount evaded- a result, which is both, intuitive, and factual, but is contrary to the prediction made by expected utility theory. Furthermore, the optimal tax rates predicted by prospect theory, in the presence of tax evasion behaviour, are consistent with actual tax rates.en_GB
dc.publisherDept. of Economics, University of Leicester.en_GB
dc.relation.ispartofseriesDiscussion Papers in Economicsen_GB
dc.subjecttax evasionen_GB
dc.subjectloss aversionen_GB
dc.subjectdecision weightsen_GB
dc.subjectprospect theoryen_GB
dc.subjectoptimal taxationen_GB
dc.titleWhy Do People Pay Taxes? An Explanation Based On Loss Aversion And Overweighting of Low Probabilitiesen_GB
Appears in Collections:Reports, Dept. of Economics

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