DP10581 Payment Evasion

Author(s): Stefan Buehler, Daniel Halbheer, Michael Lechner
Publication Date: May 2015
Keyword(s): Deterrence, Fine, Price Discrimination, Pricing
JEL(s): L20, L30
Programme Areas: Labour Economics, Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=10581

This paper models payment evasion as a source of profit by letting the firm choose the purchase price and the fine imposed on detected payment evaders. For a given price and fine, the consumers purchase, evade payment, or choose the outside option. We show that payment evasion leads to a form of second-degree price discrimination in which the purchase price exceeds the expected fine faced by payment evaders. We also show that higher fines do not necessarily reduce payment evasion. Using data on fare dodging on public transportation, we quantify expected fines and payment evasion.