HEC Research Papers Series,
HEC Paris

Abstract: This paper models payment evasion as a source of profit by letting the firm choose the price charged to paying consumers and the fine collected from detected payment evaders. The consumers choose whether to purchase, evade payment, or refrain from consumption. The authors show that payment evasion allows the firm to charge a higher price to paying consumers and to generate a higher profit. The authors also show that higher fines do not necessarily reduce payment evasion. Finally, they provide empirical evidence which is consistent with their theoretical analysis, using comprehensive micro data on fare dodging on the Zurich Transport Network.

Keywords: Payment Evasion; Pricing; Fine; Self-Selection

31 pages, November 18, 2014

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