The Role of Agents in Fraudulent Activities: Evidence from the Housing Market in China

Abstract

This paper examines the role that agents play in fraudulent activities in the housing market in China. Using a representative sample of housing transactions in Beijing from 2014 to 2017, we investigate the existence and magnitudes of the so-called Yin-Yang contracts, and explore whether and how agents affect tax evasion. First, we find that agents can learn the monitoring distance of local tax authorities through their cumulative experiences and strategically report prices as close as possible to the internal guideline prices set by local authorities. At the same time, agents' involvement in tax evasion is significantly affected by the tax evasion behaviors of their peers. Second, we show that agents’ work experiences contribute to creating more severe Yin-Yang contracts in the presence of loosening financial constraints, and vice versa. Our results suggest that agents' expertise becomes more important for buyers who face a trade-off between reporting higher to borrow more from the bank and reporting lower to evade taxes.