Abstract for: Policy Making for a Mixed Strategy Game between Taxpayers and Tax Authorities

Game theory can model rational decision making, hence it has been used for policy making. However, these recommendations can sometimes be counterintuitive, such as George Tsebelisí (1989) argument that the rate of penalty does not affect criminal behaviour, but instead it changes the behaviour of law enforcement. Kim and Kim (1997) modelled this game and found that due to oscillations in the system Tsebelisí policy recommendation is not necessarily useful for policy makers: the equilibrium level may only have little or insignificant on behaviour. We will revisit this issue by replicating Kim and Kimís model and putting into a different context: tax evasion. Our model will look at how setting the right policies, such as introduction a tax inspection rate goal or changing the behaviour of the tax authorities, can affect oscillations. Our model shows that the oscillations can be reduced by changing the rules according to which tax authorities react to tax evasion, and also eliminated by setting a goal to tax inspection rate.