Does tax evasion affect firms’ internal control? Some evidence from an experimental approach

The aim of this work is to analyze tax evasion as a factor that potentially affects internal control of firms as an application of the Chen and Chu’s model (2005). For this purpose an experimental approach was employed. Treatments varied depending on whether agents were assumed to be risk-neutral or risk-averse. According to the gift-exchange game (Fehr et al., 1993), results show a positive relationship between wages offered by principal and efforts provided by agents. In general, higher wages lead to more costly effort provision. However, when evasion and risk aversion are introduced in the analysis individuals show opportunistic behaviors and they seem to be less willing to cooperate for the wealth of the firm.