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A Behavioral Laffer Curve: Emergence of a Social Norm of Fairness in a Real Effort Experiment

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  • Louis Lévy-Garboua

    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CIRANO - Centre Interuniversitaire de Recherche en ANalyse des Organisations, CIRANO - Centre interuniversitaire de recherche en analyse des organisations - UQAM - Université du Québec à Montréal)

  • David Masclet

    (CIRANO - Centre Interuniversitaire de Recherche en ANalyse des Organisations, CIRANO - Centre interuniversitaire de recherche en analyse des organisations - UQAM - Université du Québec à Montréal, CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes 1 - Université de Caen Basse-Normandie)

  • Claude Montmarquette

    (CIRANO - Centre Interuniversitaire de Recherche en ANalyse des Organisations, CIRANO - Centre interuniversitaire de recherche en analyse des organisations - UQAM - Université du Québec à Montréal, Université de Montréal - Département de Sciences Economique - Université de Montréal)

Abstract

This paper demonstrates, through a controlled experiment, that the “Laffer curve” phenomenon does not always reflect a conventional income - leisure trade-off. Whether out of reason or out of emotion, taxpayers may also be willing to punish intentionally unfair tax setters by working less than they would under the same exogenous circumstances. We conduct a real effort experiment in which a player A (the "tax receiver") is matched with a player B (the "worker") to elicit the conditions under which tax revenues will increase under a certain threshold and decrease thereafter. We ran four different treatments by manipulating work opportunities and the power to tax. Consistent with the history of tax revolts, the working partner overreacts to the perceived unfairness of taxation when the tax rate exceeds 50%, most strongly so in the high effort treatment. With two types of players, selfish and empathic, our model predicts the emergence of a social norm of fairness under asymmetric information, and elicits the optimal and emotional patterns of punishments and rewards consistent with the norm's enforcement. The social norm allows players to coordinate tacitly on a “focal equilibrium”, which offers a solution to the indeterminacy raised by the Folk theorem for infinitely-repeated games and a behavioral justification for the tit-for-tat strategy. The social norm of fairness enhances productive efficiency in the long run.

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Bibliographic Info

Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number hal-00340459.

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Date of creation: 20 Nov 2008
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Handle: RePEc:hal:cesptp:hal-00340459

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Related research

Keywords: Taxation and labor supply; Laffer curve; experimental economics; fairness and efficiency; social norms and sanctions; informational asymmetry; emotions.;

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  1. Swenson, Charles W., 1988. "Taxpayer behavior in response to taxation: An experimental analysis," Journal of Accounting and Public Policy, Elsevier, vol. 7(1), pages 1-28.
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  8. Kleven, Henrik & Kreiner, Claus Thustrup, 2006. "The Marginal Cost of Public Funds: Hours of Work versus Labor Force Participation," CEPR Discussion Papers 5594, C.E.P.R. Discussion Papers.
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  10. Levy-Garboua, Louis & Meidinger, Claude & Rapoport, Benoit, 2006. "The Formation of Social Preferences: Some Lessons from Psychology and Biology," Handbook on the Economics of Giving, Reciprocity and Altruism, Elsevier.
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Citations

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Cited by:
  1. Koenig, Tobias & Wagener, Andreas, 2013. "Tax structure and government expenditures with tax equity concerns," Journal of Economic Behavior & Organization, Elsevier, vol. 90(C), pages 137-153.
  2. Tobias Koenig & Andreas Wagener, 2010. "Tax Structure and Government Expenditures under Tax Equity Norms," CESifo Working Paper Series 3205, CESifo Group Munich.
  3. Konrad, Kai A. & Morath, Florian & Müller, Wieland, 2010. "Taxation and market power," Discussion Papers, Research Professorship & Project "The Future of Fiscal Federalism" SP II 2010-07, Social Science Research Center Berlin (WZB).

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