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Circumstantial Risk: Impact of Future Tax Evasion and Labor Supply Opportunities on Risk Exposure

  • Doerrenberg, Philipp

    ()

    (ZEW Mannheim)

  • Duncan, Denvil

    ()

    (Indiana University)

  • Zeppenfeld, Christopher

    ()

    (University of Cologne)

This paper examines whether risk-taking in a lottery depends on the opportunity to respond to the lottery outcome through additional labor effort and/or tax evasion. Previous empirical attempts to answer this question face identification issues due to self-selection into jobs that facilitate tax evasion and labor effort flexibility. We address these identification issues using a laboratory experiment (N = 180). Subjects have the opportunity to invest earned income in a lottery and, depending on randomly assigned treatment states, have the opportunity to respond to the lottery outcome through evasion and/or extra labor effort. We find strong evidence that ex-post access to labor opportunities reduces ex-ante risk willingness while access to tax evasion has no effect on risk behavior. We discuss possible explanations for this result based on the existing literature.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7917.

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Length: 41 pages
Date of creation: Jan 2014
Date of revision:
Handle: RePEc:iza:izadps:dp7917
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