Firm s Tax Evasion in a Principal-Agent Model with Self-Protection

Gatekeepers have an increasing role in taxation and regulation. Whereas burdening them with legal liability for misconducts that benefit those who resort to their services actually discourages wrongdoings -- as will be clarified in the article -- an alienation effect can also arise. The gatekeeper might become more interested in covering up the illegal behavior. This article studies the problem with respect to tax evasion by firms in a principal-agent framework. The article highlights the role of legal rules pertaining to liability for tax evasion in shaping the parties choices, as concealment costs vary according to whether the risk-neutral principal or the risk-averse agent are held responsible when tax evasion is detected. The main result of the analysis is that there is a simple ex post test that can be run to infer whether harnessing the agent was socially beneficial.