A behavioral Laffer curve: Emergence of a social norm of fairness in a real effort experiment
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.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Kleven, Henrik Jacobsen & Kreiner, Claus Thustrup, 2006. "The marginal cost of public funds: Hours of work versus labor force participation," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 1955-1973, November.
- Egas, Martijn & Riedl, Arno, 2005.
"The Economics of Altruistic Punishment and the Demise of Cooperation,"
IZA Discussion Papers
1646, Institute for the Study of Labor (IZA).
- Arno Riedl & Martijn Egas, 2005. "The economics of altruistic punishment and the demise of cooperation," Artefactual Field Experiments 00040, The Field Experiments Website.
- Cook, Philip J & Graham, Daniel A, 1977. "The Demand for Insurance and Protection: The Case of Irreplaceable Commodities," The Quarterly Journal of Economics, MIT Press, vol. 91(1), pages 143-56, February.
- Sillamaa, M. A., 1999. "How work effort responds to wage taxation: An experimental test of a zero top marginal tax rate," Journal of Public Economics, Elsevier, vol. 73(1), pages 125-134, July.
- Akerlof, George A & Yellen, Janet L, 1990. "The Fair Wage-Effort Hypothesis and Unemployment," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 255-83, May.
- Carpenter, Jeffrey P., 2007.
"The demand for punishment,"
Journal of Economic Behavior & Organization,
Elsevier, vol. 62(4), pages 522-542, April.
- 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.
- 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,
- Louis Lévy-Garboua & Claude Meidinger & BenoŒt Rapoport, 2004. "The formation of social preferences : some lessons from psychology and biology," Cahiers de la Maison des Sciences Economiques bla04010, Université Panthéon-Sorbonne (Paris 1).
- Martin Feldstein, 1993.
"The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the1986 Tax Reform Act,"
NBER Working Papers
4496, National Bureau of Economic Research, Inc.
- Feldstein, Martin, 1995. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 551-72, June.
- Kaufman, Bruce E., 1999. "Emotional arousal as a source of bounded rationality," Journal of Economic Behavior & Organization, Elsevier, vol. 38(2), pages 135-144, February.
- Brennan, Geoffrey & Buchanan, James M., 1977. "Towards a tax constitution for Leviathan," Journal of Public Economics, Elsevier, vol. 8(3), pages 255-273, December.
- Simon Gachter & Ernst Fehr, 2000.
"Cooperation and Punishment in Public Goods Experiments,"
American Economic Review,
American Economic Association, vol. 90(4), pages 980-994, September.
- Ernst Fehr & Simon Gaechter, 1999. "Cooperation and Punishment in Public Goods Experiments," CESifo Working Paper Series 183, CESifo Group Munich.
- Ernst Fehr & Simon Gaechter, . "Cooperation and Punishment in Public Goods Experiments," IEW - Working Papers 010, Institute for Empirical Research in Economics - University of Zurich.
- Sillamaa, M. A., 1999. "Taxpayer behavior in response to taxation: comment and new experimental evidence," Journal of Accounting and Public Policy, Elsevier, vol. 18(2), pages 165-177.
- Ronald Bosman & Frans van Winden, 2002. "Emotional Hazard in a Power-to-take Experiment," Economic Journal, Royal Economic Society, vol. 112(476), pages 147-169, January.
- Jon Gruber & Emmanuel Saez, 2000.
"The Elasticity of Taxable Income: Evidence and Implications,"
NBER Working Papers
7512, National Bureau of Economic Research, Inc.
- Gruber, Jon & Saez, Emmanuel, 2002. "The elasticity of taxable income: evidence and implications," Journal of Public Economics, Elsevier, vol. 84(1), pages 1-32, April.
- Austan Goolsbee, 1999. "Evidence on the High-Income Laffer Curve from Six Decades of Tax Reform," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(2), pages 1-64.
- Robert Carroll & Warren Hrung, 2005. "What Does the Taxable Income Elasticity Say About Dynamic Responses to Tax Changes?," American Economic Review, American Economic Association, vol. 95(2), pages 426-431, May.
- Feldstein, Martin, 1995. "Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Scholarly Articles 2766676, Harvard University Department of Economics.
- Sutter, Matthias & Weck-Hannemann, Hannelore, 2003. " Taxation and the Veil of Ignorance--A Real Effort Experiment on the Laffer Curve," Public Choice, Springer, vol. 115(1-2), pages 217-40, April.
When requesting a correction, please mention this item's handle: RePEc:eee:joepsy:v:30:y:2009:i:2:p:147-161. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If references are entirely missing, you can add them using this form.