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Contribution Evasion and Expected Survival: Evidence from Bulgaria

Authors


  • I thank Franco Peracchi, Vincenzo Atella, participants in the 23rd Congress of the European Economic Association and an anonymous referee for helpful comments. The findings, interpretations and conclusions expressed in this paper are those of the author and do not necessarily represent the views of the World Bank, its Executive Directors, or the governments they represent.

Tel: +1-202-458-7488; E-mail: vperotti@worldbank.org

Abstract

This paper analyzes the evasion of social security contributions and its relationship with individual characteristics such as subjective survival expectations and perceptions on the link between contributions and benefits. In the theoretical framework, a representative worker maximizes expected intertemporal utility by choosing the optimal fraction of evaded contributions. The model predicts that under the assumption of liquidity constraints evasion may be optimal even when it has negative implications on the budget constraint, because it provides a way of weakening the liquidity constraint. In particular, evasion is decreasing in the individual's survival probability and in the Bismarckian factor characterizing the pension system. Results from the empirical analysis, carried out using data from a pilot survey in Bulgaria, show that the evasion of social security contributions is less likely among individuals with higher subjective survival probabilities and who perceive a strong link between contributions and pension benefits.

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