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Rules of Thumb and Attention Elasticities: Evidence from Under- and Overreaction to Taxes

Author

Listed:
  • William Morrison

    (UC Berkeley)

  • Dmitry Taubinsky

    (UC Berkeley and NBER)

Abstract

This paper tests costly attention models of consumers' misreaction to opaque taxes. We report an online shopping experiment that involves shrouded sales taxes that are exogenously varied within consumers over time. Some consumers systematically underreact to sales taxes whereas others systematically overreact, but higher stakes decrease both under- and overreaction. This is consistent with consumers using heterogeneous rules of thumb to compute the opaque tax when the stakes are low, but using costly mental effort at higher stakes. The results allow us to differentiate between various theories of limited attention. We also develop novel econometric techniques for quantifying individual differences.

Suggested Citation

  • William Morrison & Dmitry Taubinsky, 2023. "Rules of Thumb and Attention Elasticities: Evidence from Under- and Overreaction to Taxes," The Review of Economics and Statistics, MIT Press, vol. 105(5), pages 1110-1127, September.
    • Handle: RePEc:tpr:restat:v:105:y:2023:i:5:p:1110-1127
    DOI: 10.1162/rest_a_01126
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    Cited by:

    1. Beg, Sabrin & Islam, Mahnaz & Rahman, Khandker Wahedur, 2024. "Information and behavior: Evidence from fertilizer quantity recommendations in Bangladesh," Journal of Development Economics, Elsevier, vol. 166(C).
    2. Dertwinkel-Kalt, Markus & Köster, Mats & Sutter, Matthias, 2020. "To buy or not to buy? Price salience in an online shopping field experiment," European Economic Review, Elsevier, vol. 130(C).
    3. Andreas R. Kostøl & Andreas S. Myhre, 2021. "Labor Supply Responses to Learning the Tax and Benefit Schedule," American Economic Review, American Economic Association, vol. 111(11), pages 3733-3766, November.
    4. Sergiu Burlacu & Austėja Kažemekaitytė & Piero Ronzani & Lucia Savadori, 2022. "Blinded by worries: sin taxes and demand for temptation under financial worries," Theory and Decision, Springer, vol. 92(1), pages 141-187, February.
    5. Tomoharu Mori & Katsuya Takii, 2025. "The Effect of Coarse Score Labels on College Application Decisions," OSIPP Discussion Paper 25E002, Osaka School of International Public Policy, Osaka University.
    6. Drew Fudenberg & Giacomo Lanzani & Philipp Strack, 2021. "Limit Points of Endogenous Misspecified Learning," Econometrica, Econometric Society, vol. 89(3), pages 1065-1098, May.
    7. Ciril Bosch-Rosa & Bernhard Kassner & Steffen Ahrens, 2024. "Overconfidence and the Political and Financial Behavior of a Representative Sample," Berlin School of Economics Discussion Papers 0051, Berlin School of Economics.
    8. Martin, Daniel & Muñoz-Rodriguez, Edwin, 2022. "Cognitive costs and misperceived incentives: Evidence from the BDM mechanism," European Economic Review, Elsevier, vol. 148(C).
    9. Chuang, Shih-Hsien, 2024. "Behavioral optimization of US air travel taxes," Research in Transportation Economics, Elsevier, vol. 105(C).
    10. Sydnee Caldwell & Scott Nelson & Daniel Waldinger, 2023. "Tax Refund Uncertainty: Evidence and Welfare Implications," American Economic Journal: Applied Economics, American Economic Association, vol. 15(2), pages 352-376, April.

    More about this item

    JEL classification:

    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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