Evolutionary tax evasion, prospect theory and heterogeneous taxpayers

This work studies the dynamics of compliance and optimal auditing in a population of boundedly rational agents who decide whether to engage in tax evasion depending on an evolutionary adaptation process. If they decide to evade taxes, taxpayers can choose different ways to engage in tax evasion and face different auditing probabilities. Moreover, taxpayers make decisions according to the (realistic) principles of Prospect Theory. The analysis studies the intertemporal optimal auditing of a tax authority that targets tax revenues maximization and strategically selects audit probabilities to manage the trade-off created by controlling different modes of evasion with a resource constraint.