Nigar Hashimzade

Applications of Behavioural Economics to Tax Evasion

The paper reviews recent models that have applied the techniques of behavioural economics to the analysis of the tax compliance choice of an individual taxpayer. The construction of these models is motivated by the failure of the Yitzhaki version of the Allingham–Sandmo model to predict correctly the proportion of taxpayers who will evade and the effect of an increase in the tax rate upon the chosen level of evasion. Recent approaches have applied non-expected utility theory to the compliance decision and have addressed social interaction. The models we describe are able to match the observed extent of evasion and correctly predict the tax effect but do not have the parsimony or precision of the Yitzhaki model.

Type I and type II fractional Brownian motions: A reconsideration

The so-called type I and type II fractional Brownian motions are limit distributions associated with the fractional integration model in which pre-sample shocks are either included in the lag structure, or suppressed. There can be substantial differences between the distributions of these two processes and of functionals derived from them, so that it becomes an important issue to decide which model to use as a basis for inference. Alternative methods for simulating the type I case are contrasted, and for models close to the nonstationarity boundary, truncating infinite sums is shown to result in a significant distortion of the distribution. A simple simulation method that overcomes this problem is described and implemented. The approach also has implications for the estimation of type I ARFIMA models, and a new conditional ML estimator is proposed, using the annual Nile minima series for illustration.

Fixed-b asymptotic approximation of the sampling behaviour of nonparametric spectral density estimators

We propose a new asymptotic approximation for the sampling behaviour of nonparametric estimators of the spectral density of a covariance stationary time series. According to the standard approach, the truncation lag grows more slowly than the sample size. We derive first-order limiting distributions under the alternative assumption that the truncation lag is a fixed proportion of the sample size. Our results extend the approach of Neave (1970), who derived a formula for the asymptotic variance of spectral density estimators under the same truncation lag assumption. We show that the limiting distribution of zero-frequency spectral density estimators depends on how the mean is estimated and removed. The implications of our zero-frequency results are consistent with exact results for bias and variance computed by Ng and Perron (1996). Finite sample simulations indicate that the new asymptotics provides a better approximation than the standard one. Copyright 2007 The Authors Journal compilation 2007 Blackwell Publishing Ltd.

GROWTH AND PUBLIC INFRASTRUCTURE

The paper analyzes a multicountry extension of the Barro model of productive public expenditure. In the presence of positive infrastructural externalities between countries, the provision of infrastructure will be inefficiently low if countries do not coordinate. This provides a role for a supranational body, such as the European Union, to coordinate the policies of the individual governments. It is shown how intervention by a supranational body can raise welfare by internalizing the infrastructural externality. Infrastructural externalities increase the importance of tax policy in the growth process and distribute the benefits of taxation across countries.

Alternative Frequency And Time Domain Versions Of Fractional Brownian Motion

This paper compares models of fractional processes and associated weak convergence results based on moving average representations in the time domain with spectral representations. Both approaches have been applied in the literature on fractional processes. We point out that the conventional forms of these models are not equivalent, as is commonly assumed, even under a Gaussianity assumption. We show that it is necessary to distinguish between “two-sided†processes depending on both leads and lags from one-sided or “causal†processes, because in the case of fractional processes these models yield different limiting properties. We derive new representations of fractional Brownian motion and show how different results are obtained for, in particular, the distribution of stochastic integrals in the multivariate context. Our results have implications for valid statistical inference in fractional integration and cointegration models.We thank F. Hashimzade and two anonymous referees for their valuable comments.

Representation and Weak Convergence of Stochastic Integrals with Fractional Integrator Processes

This paper considers the asymptotic distribution of the covariance of a nonstationary fractionally integrated process with the stationary increments of another such process - possibly, itself. Questions of interest include the relationship between the harmonic representation of these random variables, which we have analysed in a previous paper, and the construction derived from moving average representations in the time domain. The limiting integrals are shown to be expressible in terms of functionals of Ito integrals with respect to two distinct Brownian motions. Their mean is nonetheless shown to match that of the harmonic representation, and they satisfy the required integration by parts rule. The advantages of our approach over the harmonic analysis include the facts that our formulae are valid for the full range of the long memory parameters, and extend to non-Gaussian processes.

Risk-based Audits in a Behavioral Model:

The tools of predictive analytics are widely used in the analysis of large data sets to predict future patterns in the system. In particular, predictive analytics is used to estimate risk of engaging in certain behavior. Risk-based audits are used by revenue services to target potentially noncompliant taxpayers, but the results of predictive analytics serve predominantly only as a guide rather than a rule. “Auditor judgment” retains an important role in selecting audit targets. This article assesses the effectiveness of using predictive analytics in a model of the compliance decision that incorporates several components from behavioral economics: subjective beliefs about audit probabilities, a social custom reward from honest tax payment, and a degree of risk aversion that increases with age. Simulation analysis shows that predictive analytics are successful in raising compliance and that the resulting pattern of audits is very close to being a cutoff rule.

Uniform Versus Discriminatory Tariffs

We analyze the non-cooperative interaction between two exporting countries producing differentiated products and one importing country when governments use optimal policies to maximize welfare. The analysis includes product differentiation, asymmetric costs, and Bertrand competition. For identical exporting countries we demonstrate that the importing country always prefers a uniform tariff regime while both exporting countries prefer a discriminatory tariff regime for any degree of product differentiation. If countries are asymmetric in terms of production cost then the higher-cost exporter always prefers the discriminatory regime but the lower-cost exporter prefers the uniform regime if there is a significant cost differential. With cost asymmetry the announcement of a uniform tariff regime by the importer is not a credible strategy since there is an incentive to deviate to discrimination. This implies an international body can play a role in ensuring that tariff agreements are respected.

Inequality and the Choice of the Personal Tax Base

It is possible to employ either income or expenditure as the base for personal taxation. A considerable literature has developed that investigates the relative efficiency of these bases. The answer is usually in favor of the expenditure tax since it does not distort the choice between consumption and saving. In contrast, the literature is almost silent on the relative equity of the two bases. We investigate the redistributive consequences of the choice in models with two sources of heterogeneity: skill in employment and lump-sum endowment. The Gini coefficient is used to measure the degree of equity achieved by the tax bases in static and dynamic settings. Income taxes and expenditure taxes that generate equal welfare or equal revenue are compared. In the static economy the income tax leads to lower inequality except when skill and endowment are negatively correlated. Inequality is always lower with the income tax in the dynamic economy. These results support the choice of income as the base for personal taxation if reduction in inequality is a priority of policy.

Survival, Uncertainty, and Equilibrium Theory: An Exposition

The last twenty years have witnessed a significant growth of the literature on the “survival problem”, primarily in the context of the causes and remedies of famines. Once a subject essentially of empirical development economics, economic survival became an issue of analytical economics and, most recently, of general equilibrium theory. We review several issues of the survival problem in the general equilibrium framework. First, we consider a Walrasian economy with intrinsic uncertainty affecting the endowments and compute the asymptotic probability of survival under different assumptions of dependence among the agents. Next, we show how the presence of extrinsic uncertainty in a dynamic economy may lead to a ruin in a sunspot equilibrium. Finally, we analyze the link between survival and specialization in production.