Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/100524
Authors: 
Meyer-Brauns, Philipp
Year of Publication: 
2014
Series/Report no.: 
Beiträge zur Jahrestagung des Vereins für Socialpolitik 2014: Evidenzbasierte Wirtschaftspolitik - Session: Financial Markets and Information G09-V2
Abstract: 
This paper derives the optimal financial contract when a borrowing entrepreneur can evade taxes in a model of costly state verification. In contrast to previous literature on costly state verification and financial contracting, we find that standard debt contracts are not optimal when tax evasion is possible. Instead, the optimal contract is debt-like only for very low and very high profit realizations, and features a constant repayment and verification of returns in an intermediate range. This occurs because the entrepreneur has to be given a positive rent even under verification in order to not abuse her limited liability protection for excessive tax evasion activities.
JEL: 
G30
H26
D82
Document Type: 
Conference Paper

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