Redistribution and Tax Evasion: an Asymmetric Information Approach

The article studies the optimal redistribution system, achieved by direct taxation, indirect taxation and public provision of the pseudo-necessary good, when individuals, who differ in productivity, can take hidden actions (tax evasion by moral hazard) and have hidden information (tax evasion by adverse selection). It proves that any Government willing to effectively reallocate resources among individuals has to undertake measures against tax evasion, i.e. to establish tax evasion fines.