How Much Rationality Tolerates the Shadow Economy?– An Agent-Based Econophysics Approach - Advances in Social Simulation - page 118

How Much Rationality Tolerates the Shadow Economy?
- An Agent-Based Econophysics Approach

Sascha Hokamp 1 and Gotz Seibold 2

1

Institute of Economics, BTU Cottbus, P.O. Box 101344, 03013 Cottbus, Germany
[e-mail]

2

Institute of Physics, BTU Cottbus, P.O. Box 101344, 03013 Cottbus, Germany
[e-mail]

Abstract. We calculate the size of the shadow economy within a multi-agent
econophysics model previously developed for the study of tax evasion. In partic-
ular, we analyze deviating behavior depending on the fraction of rational agents
which aim to pursue their self interest. Two audit mechanisms are considered
within our model, that are, (i) a constant compliance period which is enforced af-
ter black market activities of an agent have been detected and (ii) a backauditing
method which determines the compliance period according to the particpation
rate in the shadow economy within a previously preassigned time interval. We
calibrate our simulation with respect to experimental evidence of tax compliance
in France and Germany and give estimates for the percentage of selfish agents in
these countries. This implies different policy recommendations that may work to
fight the shadow economy, tax evasion, and the like.

Keywords: shadow economy; econophysics; multi-agent model.

1 Introduction

Theoretical approaches to account for shadow economy and tax compliance are often
based on the seminal work of Allingham and Sandmo (1972) which incorporates poten-
tial penalties, tax rates and audit probabilities as basic parameters in order to evaluate
the expected utility of tax payers. Obviously one of the reasons why people participate
in the shadow economy is to circumvent the tax system. Vice versa the shadow econ-
omy is often taken as a proxy for the amount of tax evasion (Alm et al., 2012) although
the former is naturally driven by additional factors. Buehn and Schneider (2012) de-
fine shadow economy “as all market-based legal production of goods and services that
are deliberately concealed from public authorities ....”. The size of this production is of
course depending on efficient audit mechanisms and penalties which provides the link
for the application of theories originally developed for the modelling of tax compliance.
In this regard agent-based models have been set up as a comparatively new tool for
analyzing tax compliance issues. In fact, an essential feature of any agent-based model
is the direct non-market based interaction of agents, which is combined with some pro-
cess that allows for changes in individual behavior patterns 1 . Therefore, agent-based tax

1

An exception is the work by Szabo et al. (2009, 2010).