Tax evasion and competition in a differentiated duopoly

Abstract

This paper investigates the relation between market competition and firms’ tax evasion in a duopoly with differentiated products under both Bertrand and Cournot conjectures. The previous literature has shown that competition can lead to higher or lower tax evasion. Our paper can help to conciliate these different results by showing that a negative or a positive relation depends on what causes competitive pressure (i.e. an increase of the marginal cost, a higher product substitutability or a change of the mode of competition) and the pre-existing level of competition.