Compatibility in tax reporting

Abstract

Purpose - to describe a compliance-monitoring equilibrium in presence of compatibility costs in a setting when managers and other parties have different attitude towards compliance. Design/Method/Approach. Classical game theory - Nash equilibrium. Findings. If compatibility costs are small, there exist a unique stable Nash equilibrium of the game between the tax authority and a population of heterogeneous firms. In this equilibrium, the relation between compatibility costs and compliance is non-monotonic and depends on the curvature of auditing function. However, compatibility costs reduce non-compliance in low cheating regimes and may enhance it when many firms are cheating. Limitations. The model is at high level of abstraction and neglects many important detail that characterize each field where it could be potentially applied. Theoretical implications. The results provide one rationale for developing countries to be cautious with employing refined auditing schemes and for developed countries to promote complicated accounting procedures. Originality/value. Compatibility costs are not previously considered in economic analysis of compliance. Paper type - conceptual.