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

  • Louis Lévy-Garboua

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics, 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 - UR1 - Université de Rennes 1 - Université de Caen Basse-Normandie - CNRS - Centre National de la Recherche Scientifique)

  • 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)

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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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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  16. 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.
  17. 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).
  18. 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.
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  20. George A. Akerlof & Janet L. Yellen, 1990. "The Fair Wage-Effort Hypothesis and Unemployment," The Quarterly Journal of Economics, Oxford University Press, vol. 105(2), pages 255-283.
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