Dynamic history-dependent tax and environmental compliance monitoring of risk-averse firms

Abstract Firms may misreport income or fail to comply with environmental regulations. This study contributes the growing literature that analyzes dynamic history-dependent compliance monitoring, under which penalties monitoring frequency are selected on basis of recent history. The current develops methods for evaluating and comparing explicit solutions given costs distributions, using a commonplace utility-penalty scenario firms never fully regulations if statically monitored (regardless their distribution), but find it benefit, dynamically monitored, when is sufficiently high. In most examples tried, superior even constrained monitor all at rates below optimal static rate. model applied actual IRS 2010 tax-report data partitioned by bracket. allows, in particular, deduce degrees risk aversion.