Decisions under uncertainty Example: Labor supply and tax evasion

Nested structure Honest or evader? Given honest: Hours supplied Given evader: Hours supplied in the regular as well as in the irregular market

Given honest strategy Budget constraint

Given honest strategy Random utility function

Given honest strategy Expected indirect utlity

Given honest strategy Conditional choice probability,

Given honset strategy Clogit probability

Given evasion strategy Budget constraint, detected

Given evasion strategy Budget constraint, not detected

Given evasion strategy Rank-dependent expected utlity

Given evasions strategy Given a>0

Given evasion strategy Given a>0

Given evasion strategy Random utility function

Given evasion strategy Expected indirect utility

Given evasion strategy Conditional choice probability

Honesty or evasion? The choice probabilities

Norm and opportunity density G(z)=exp(zg) The choice probabilities are weighted choice probabilities

Choice probabilities Unconditional probabilities

The likelihood

Empirical specification Deterministic part of the utility function

Variables in the utility function C= disposable household income h=annual hours worked X1=age in years X2=1if female, =0 if male

Variables in opportunity density Z1=1 if the the individua thinks that tax evasion is accepted in society, =0 else Z2=1 if the individual works in the construction sector, =0 else Z3=1 if the individual works in the public sector,=0 else

Variables/parameter s CoefficientEstimatest-values C, constant 0 C,exponent Leisure, constant 0 Leisure age 1 Leisure female 2 Rank-dependencea Opportunity,constan t g0g Opportunity, bad norm g1g Opportunity construction g2g Opportunity publicg3g Number of observations 626 Log-likelihood-1068 McFaddens rho0.54 Source: Kristine von Simson, Skatteunndragelse og arbeidstilbud, Masteroppgave, 2005, surveydata 2003