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Regulatory performance of audit tournaments and compliance observability

Author

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  • Cason, Timothy N.
  • Friesen, Lana
  • Gangadharan, Lata

Abstract

This paper examines the effectiveness of traditional regulatory schemes and newly emerging social information schemes for achieving compliance. Our experiment focuses on two stochastic audit schemes for enforcing regulatory compliance. In the Random Audit mechanism firms are randomly chosen for inspection. In the Tournament Audit mechanism the probability of inspection increases with the degree of estimated underreporting. To study the effects of social information, the experiment varies the observability of identity, output, and compliance decisions. Optimal output is theoretically independent of the auditing scheme, but equilibrium reporting is higher under the Tournament mechanism than Random auditing. Experimental findings are broadly consistent with the theoretical predictions for reporting, but deviate modestly for output. In particular, we find that average output is lower and reporting is higher in the Tournament treatment compared to the Random Audit treatment. At the individual level, a majority of participants misreported in most periods. Social observability does not affect output or reporting significantly in either of the audit treatments.

Suggested Citation

  • Cason, Timothy N. & Friesen, Lana & Gangadharan, Lata, 2016. "Regulatory performance of audit tournaments and compliance observability," European Economic Review, Elsevier, vol. 85(C), pages 288-306.
  • Handle: RePEc:eee:eecrev:v:85:y:2016:i:c:p:288-306
    DOI: 10.1016/j.euroecorev.2016.03.009
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    Cited by:

    1. repec:eee:resene:v:48:y:2017:i:c:p:83-97 is not listed on IDEAS
    2. Christian A. Vossler & Scott M. Gilpatric, 2017. "Endogenous Tax Audits and Taxpayer Assistance Services: Theory and Experiments," Working Papers 2017-01, University of Tennessee, Department of Economics.
    3. repec:eee:jeeman:v:84:y:2017:i:c:p:62-83 is not listed on IDEAS
    4. Banerjee, Ritwik & Mitra, Arnab, 2017. "On Monetary and Non-Monetary Interventions to Combat Corruption," IZA Discussion Papers 10608, Institute for the Study of Labor (IZA).
    5. Ralph-C. Bayer, 2017. "The Double Dividend of Relative Auditing – Theory and Experiments on Corporate Tax Enforcement," School of Economics Working Papers 2017-14, University of Adelaide, School of Economics.

    More about this item

    Keywords

    Auditing; Rank-order tournament; Laboratory experiment; Social observability; Tax compliance;

    JEL classification:

    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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