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. It highlights the role of legal rules pertaining to liability for tax evasion in shaping the choices of the parties, as concealment costs vary according to whether the risk-neutral principal or the riskaverse agent is 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 carried out to infer whether harnessing the agent was socially beneficial.