revised version published in: Journal of Public Economics, 2007, 91 (11-12), 2089-2112.
The paper extends the standard tax evasion model by allowing for social interactions. In
Manski’s (1993) nomenclature, our model takes into account social conformity effects (i.e.,
endogenous interactions), fairness effects (i.e., exogenous interactions) and sorting effects
(i.e., correlated effects). Our model is tested using experimental data. Participants must
decide how much income to report given their tax rate and audit probability, and given those
faced by the other members of their group as well as their mean reported income. The
estimation is based on a two-limit simultaneous tobit with fixed group effects. A unique social
equilibrium exists when the model satisfies coherency conditions. In line with Brock and
Durlauf (2001b), the intrinsic nonlinearity between individual and group responses is
sufficient to identify the model without imposing any exclusion restrictions. Our results are
consistent with fairness effects but reject social conformity and correlated effects.
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