Anonymous Money, Moral Sentiments and Welfare

38 Pages Posted: 27 Sep 2004

See all articles by Vesa Kanniainen

Vesa Kanniainen

University of Helsinki - Department of Political and Economic Studies; CESifo (Center for Economic Studies and Ifo Institute)

Jenni Paakkonen

Government of the Republic of Finland - VATT Institute for Economic Research; Bank of Finland - Institute for Economies in Transition (BOFIT)

Date Written: August 2004

Abstract

Some markets are prone to develop shadow transactions for the purpose of tax avoidance. Moral sentiments control the allocation of consumers between the legal and illicit markets. Such sentiments include self-esteem and social disapproval. The market solution leads to fiscal externality resulting from tax avoidance and highlights the conflict between private opportunism and collective values. Shadow markets may, however, enhance consumer welfare by limiting the pricing power of firms and by controlling tax collection. The paper develops a model of endogenous segmentation of markets between moral and immoral behavior. The legal producer can price the self-esteem of honest people, who can blackmail the legal producer with their option of visiting the illicit market. The model has implications for monetary economics: moral sentiments, tax rates, illegal transactions, and probability of being caught become relevant for the demand for money.

Keywords: moral sentiments, shadow economy, welfare

JEL Classification: D43, D69, E41, H26, L13

Suggested Citation

Kanniainen, Vesa and Paakkonen, Jenni, Anonymous Money, Moral Sentiments and Welfare (August 2004). Available at SSRN: https://ssrn.com/abstract=595382 or http://dx.doi.org/10.2139/ssrn.595382

Vesa Kanniainen (Contact Author)

University of Helsinki - Department of Political and Economic Studies ( email )

P.O. Box 54
FIN-00014 Helsinki
Finland
+358-0-9-1911 (Phone)
+358-0-191-8877 (Fax)

HOME PAGE: http://www.cesifo.de

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Jenni Paakkonen

Government of the Republic of Finland - VATT Institute for Economic Research ( email )

Arkadiankatu 7
P.O Box 1279
Helsinki, FIN-00531
Finland

Bank of Finland - Institute for Economies in Transition (BOFIT)

PO Box 160
Helsinki 00101
Finland

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