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Tax Return Preparers and Tax Evasion

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  • Dubin, Jeffrey A.
  • Kalsow, Gretchen A.
  • Udell, Michael A.
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    Abstract

    We report on experiments of simple, repeated asset markets in two risky securities and one risk-free security, set up to test the Capital Asset Pricing Model (CAPM), which embeds the two most essential principles of modern asset pricing theory, namely, (i) financial markets equilibrate, (ii) in equilibrium, risk premia are solely determined by covariance with aggregate risk. Slow, but steady convergence towards the CAPM is discovered. The convergence process, however, halts before reaching the actual equilibrium. There is ample evidence that subjects gradually move up in mean-variance space, in accordance with the CAPM. Yet, adjustment stops as if the remaining trading time was insufficient to complete all the transactions that are needed to guarantee improvements in positions. We conjecture that this is due to subjects' hesitance in the face of market thinness. Because the convergence process halts, statistical tests reject the CAPM.

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    File URL: http://www.hss.caltech.edu/SSPapers/wp1031.pdf
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    Bibliographic Info

    Paper provided by California Institute of Technology, Division of the Humanities and Social Sciences in its series Working Papers with number 1031.

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    Length: 46 pages
    Date of creation: Apr 1998
    Date of revision:
    Publication status: Published:
    Handle: RePEc:clt:sswopa:1031

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    Postal: Working Paper Assistant, Division of the Humanities and Social Sciences, 228-77, Caltech, Pasadena CA 91125
    Phone: 626 395-4065
    Fax: 626 405-9841
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    Web page: http://www.hss.caltech.edu/ss

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    Postal: Working Paper Assistant, Division of the Humanities and Social Sciences, 228-77, Caltech, Pasadena CA 91125
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    Related research

    Keywords: Capital Asset Pricing Model (CAPM); Experimental Economics; Financial Markets; Equilibrium; Equilibration;

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