Analyzing Institutional Uncertainty in the Context of a Simple Audit Scheme

This study examines how different dynamic audit strategies affect tax evasion within an agent-based model embedded in a small-world network, where the only enforcement mechanism is a dynamic audit cutoff rule. Taxpayers attempt to identify the cutoff by observing their social networks, in which information about audits spreads, and adapting their own behavior accordingly. Results show that increased uncertainty can reduce the intensity of evasion - i.e., the average amount evaded per person - but not necessarily its incidence, meaning the share of taxpayers who evade at all. Different uncertainty mechanisms may interfere with each other, highlighting that the structure of uncertainty matters more than its mere presence.