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Tax Farming Redux: Experimental Evidence on Performance Pay for Tax Collectors

Author

Listed:
  • Adnan Q. Khan
  • Asim I. Khwaja
  • Benjamin A. Olken

Abstract

Performance pay for tax collectors has the potential to raise revenues, but might come at a cost if it increases the bargaining power of tax collectors vis-à-vis taxpayers. We report the first large-scale field experiment on these issues, where we experimentally allocated 482 property tax units in Punjab, Pakistan, into one of three performance pay schemes or a control. After two years, incentivized units had 9.4 log points higher revenue than controls, which translates to a 46% higher growth rate. The scheme that rewarded purely on revenue did best, increasing revenue by 12.9 log points (64% higher growth rate), with little penalty for customer satisfaction and assessment accuracy compared to the two other schemes that explicitly also rewarded these dimensions. The revenue gains accrue from a small number of properties becoming taxed at their true value, which is substantially more than they had been taxed at previously. The majority of properties in incentivized areas in fact pay no more taxes, but instead report higher bribes. The results are consistent with a collusive setting in which performance pay increases collectors’ bargaining power over taxpayers, who have to either pay higher bribes to avoid being reassessed or pay substantially higher taxes if collusion breaks down. JEL Codes: D73, H26, H83, J33.

Suggested Citation

  • Adnan Q. Khan & Asim I. Khwaja & Benjamin A. Olken, 2016. "Tax Farming Redux: Experimental Evidence on Performance Pay for Tax Collectors," The Quarterly Journal of Economics, Oxford University Press, vol. 131(1), pages 219-271.
  • Handle: RePEc:oup:qjecon:v:131:y:2016:i:1:p:219-271.
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    File URL: http://hdl.handle.net/10.1093/qje/qjv042
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    Citations

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    1. repec:eee:wdevel:v:105:y:2018:i:c:p:171-188 is not listed on IDEAS
    2. repec:aea:aecrev:v:107:y:2017:i:5:p:1-26 is not listed on IDEAS
    3. Valsecchi, Michele, 2016. "Corrupt Bureaucrats: The Response of Non-Elected Officials to Electoral Accountability," Working Papers in Economics 684, University of Gothenburg, Department of Economics.
    4. repec:eee:pubeco:v:152:y:2017:i:c:p:47-54 is not listed on IDEAS
    5. B. Kelsey Jack & Grant Smith, 2016. "Charging Ahead: Prepaid Electricity Metering in South Africa," NBER Working Papers 22895, National Bureau of Economic Research, Inc.
    6. Biddle, Nicholas & Fels, Katja & Sinning, Mathias, 2017. "Behavioral insights and business taxation: Evidence from two randomized controlled trials," Ruhr Economic Papers 698, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    7. Sergey V. Popov, 2016. "On Basu's Proposal: Fines Affect Bribes," Economics Working Papers 16-04, Queen's Management School, Queen's University Belfast.
    8. Chemla, Gilles & Hennessy, Christopher, 2016. "The Paradox of Policy-Relevant RCTs and Natural Experiments," CEPR Discussion Papers 11361, C.E.P.R. Discussion Papers.
    9. Chen, Shawn Xiaoguang, 2017. "The effect of a fiscal squeeze on tax enforcement: Evidence from a natural experiment in China," Journal of Public Economics, Elsevier, vol. 147(C), pages 62-76.
    10. Khan, Adnan Q. & Khwaja, Asim Ijaz & Olken, Benjamin A., 2016. "Making Moves Matter: Experimental Evidence on Incentivizing Bureaucrats through Performance-Based Transfers," Working Paper Series rwp17-006, Harvard University, John F. Kennedy School of Government.

    More about this item

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H83 - Public Economics - - Miscellaneous Issues - - - Public Administration
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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