Received: 20 June 2018 | Revised: 10 January 2019 | Accepted: 24 January 2019 DOI: 10.1111/ecpo.12130 ORIGINAL ARTICLE Kleptocracy and tax evasion under resource abundance Hamid Mohtadi1,2 | Michael L. Ross3 | Uchechukwu Jarrett4 | Stefan Ruediger5 1University of Wisconsin, Milwaukee, Wisconsin Abstract 2University of Minnesota, Minneapolis, Evidence has shown that petroleum wealth is associated Minnesota with less transparency and at the same time less tax collec- 3 UCLA, Los Angeles, California tion. In this paper, we find that the two issues are linked 4 University of Nebraska, Lincoln, Nebraska through the citizens’ tax evasion behavior. We develop a 5 Arizona State University, Tempe, Arizona model to explain this link and conduct extensive empirical Correspondence tests of its validity. The explanation is that officials tradeoff Hamid Mohtadi, University of Wisconsin, greater transparency to improve tax compliance against less Milwaukee, WI. transparency to increase gains from corruption. Oil wind- Email:
[email protected] falls diminish tax revenue needs, causing officials to opti- Funding information mize on less transparency. Seeing this, citizens optimize on Economic Research Forum a lower level of tax compliance. At equilibrium, both de- cline with a positive oil shock. We also study the alternative channel in which tax compliance responds to enforcement. Transparency is found to be the more robust channel. Ignoring citizens’ strategic behavior would lead to predict- ing suboptimal investment in state capacity for tax enforce- ment. Using giant oil discoveries data combined with oil price data, we develop a dynamic composite instrument and estimate the model with a dynamic panel system general- ized method of moments.