IDEAS home Printed from https://ideas.repec.org/p/mub/wpaper/2019-08.html

A Competitive Audit Selection Mechanism with Incomplete Information

Author

Listed:
  • Miloš Fišar

    (Masaryk University)

  • Ondřej Krčál

    (Masaryk University)

  • Jiří Špalek

    (Masaryk University)

  • Rostislav Staněk

    (Masaryk University)

  • James Tremewan

    (University of Auckland)

Abstract

The experimental tax and regulatory compliance literature has shown the effectiveness of competitive audit selection mechanisms (ASMs) based on declarations and a signal of the taxpayers' actual income. However, collecting information about actual income prior to audit selection is costly. In this article, we test the effectiveness of an endogenous ASM based solely on declared income. We show theoretically and in a laboratory experiment that this new endogenous ASM significantly increases compliance in comparison with an ASM where all taxpayers face audit with equal probability. However, a further consequence of conditioning solely on declared income is that poorer taxpayers are audited more frequently, reducing the effectiveness of this ASM in generating revenue and reducing inequality. We further compare the new mechanism with an ASM that also uses a noisy signal of actual income and show that it is a significant improvement over the other two ASMs in terms of compliance, revenue, and inequality. Our results suggest that ASMs that condition only on reported income can increase compliance but should be implemented with caution, and investing in acquiring information before audit selection can have substantial benefits.

Suggested Citation

  • Miloš Fišar & Ondřej Krčál & Jiří Špalek & Rostislav Staněk & James Tremewan, 2019. "A Competitive Audit Selection Mechanism with Incomplete Information," MUNI ECON Working Papers 2019-08, Masaryk University, revised Feb 2023.
    • Handle: RePEc:mub:wpaper:2019-08
    DOI: 10.5817/WP_MUNI_ECON_2019-08
    as

    Download full text from publisher

    File URL: http://repec.econ.muni.cz/mub/wpaper/wp/econ/WP_MUNI_ECON_2019-08.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.5817/WP_MUNI_ECON_2019-08?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Sanchez, Isabel & Sobel, Joel, 1993. "Hierarchical design and enforcement of income tax policies," Journal of Public Economics, Elsevier, vol. 50(3), pages 345-369, March.
    2. Meiselman, Ben S., 2018. "Ghostbusting in Detroit: Evidence on nonfilers from a controlled field experiment," Journal of Public Economics, Elsevier, vol. 158(C), pages 180-193.
    3. Hebous, Shafik & Jia, Zhiyang & Løyland, Knut & Thoresen, Thor O. & Øvrum, Arnstein, 2023. "Do Audits Improve Future Tax Compliance in the Absence of Penalties? Evidence from Random Audits in Norway," Journal of Economic Behavior & Organization, Elsevier, vol. 207(C), pages 305-326.
    4. Henrik Jacobsen Kleven & Martin B. Knudsen & Claus Thustrup Kreiner & Søren Pedersen & Emmanuel Saez, 2011. "Unwilling or Unable to Cheat? Evidence From a Tax Audit Experiment in Denmark," Econometrica, Econometric Society, vol. 79(3), pages 651-692, May.
    5. Nadja Dwenger & Henrik Kleven & Imran Rasul & Johannes Rincke, 2016. "Extrinsic and Intrinsic Motivations for Tax Compliance: Evidence from a Field Experiment in Germany," American Economic Journal: Economic Policy, American Economic Association, vol. 8(3), pages 203-232, August.
    6. Alm, James & Jackson, Betty & McKee, Michael J., 1992. "Estimating the Determinants of Taxpayer Compliance with Experimental Data," National Tax Journal, National Tax Association, vol. 45(1), pages 107-14, March.
    7. Geraci, Andrea & Nardotto, Mattia & Reggiani, Tommaso & Sabatini, Fabio, 2022. "Broadband Internet and social capital," Journal of Public Economics, Elsevier, vol. 206(C).
    8. Bayer, Ralph & Cowell, Frank, 2009. "Tax compliance and firms' strategic interdependence," Journal of Public Economics, Elsevier, vol. 93(11-12), pages 1131-1143, December.
    9. Oestreich, Andreas Marcel, 2017. "On optimal audit mechanisms for environmental taxes," Journal of Environmental Economics and Management, Elsevier, vol. 84(C), pages 62-83.
    10. James Alm, 2012. "Measuring, explaining, and controlling tax evasion: lessons from theory, experiments, and field studies," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(1), pages 54-77, February.
    11. Arun Advani & William Elming & Jonathan Shaw, 2023. "The Dynamic Effects of Tax Audits," The Review of Economics and Statistics, MIT Press, vol. 105(3), pages 545-561, May.
    12. Scott M. Gilpatric & Christian A. Vossler & Michael McKee, 2011. "Regulatory enforcement with competitive endogenous audit mechanisms," RAND Journal of Economics, RAND Corporation, vol. 42(2), pages 292-312, June.
    13. Mittone, Luigi & Panebianco, Fabrizio & Santoro, Alessandro, 2017. "The bomb-crater effect of tax audits: Beyond the misperception of chance," Journal of Economic Psychology, Elsevier, vol. 61(C), pages 225-243.
    14. Slemrod, Joel & Blumenthal, Marsha & Christian, Charles, 2001. "Taxpayer response to an increased probability of audit: evidence from a controlled experiment in Minnesota," Journal of Public Economics, Elsevier, vol. 79(3), pages 455-483, March.
    15. Alm, James & Jackson, Betty & McKee, Michael J., 1992. "Estimating the Determinants of Taxpayer Compliance With Experimental Data," National Tax Journal, National Tax Association;National Tax Journal, vol. 45(1), pages 107-114, March.
    16. Gerlinde Fellner & Rupert Sausgruber & Christian Traxler, 2013. "Testing Enforcement Strategies In The Field: Threat, Moral Appeal And Social Information," Journal of the European Economic Association, European Economic Association, vol. 11(3), pages 634-660, June.
    17. Maciejovsky, Boris & Kirchler, Erich & Schwarzenberger, Herbert, 2007. "Misperception of chance and loss repair: On the dynamics of tax compliance," Journal of Economic Psychology, Elsevier, vol. 28(6), pages 678-691, December.
    18. Bock, Olaf & Baetge, Ingmar & Nicklisch, Andreas, 2014. "hroot: Hamburg Registration and Organization Online Tool," European Economic Review, Elsevier, vol. 71(C), pages 117-120.
    19. Colson, Gregory & Menapace, Luisa, 2012. "Multiple receptor ambient monitoring and firm compliance with environmental taxes under budget and target driven regulatory missions," Journal of Environmental Economics and Management, Elsevier, vol. 64(3), pages 390-401.
    20. Andreas Oestreich, 2015. "Firms’ Emissions and Self-Reporting Under Competitive Audit Mechanisms," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 62(4), pages 949-978, December.
    21. Christiansen, Tobias Gabel, 2024. "Dynamic effects of tax audits and the role of intentions," Journal of Public Economics, Elsevier, vol. 234(C).
    22. Cason, Timothy N. & Friesen, Lana & Gangadharan, Lata, 2016. "Regulatory performance of audit tournaments and compliance observability," European Economic Review, Elsevier, vol. 85(C), pages 288-306.
    23. Anna Maria Menichini & Peter Simmons, 2014. "Sorting the good guys from bad: on the optimal audit structure with ex-ante information acquisition," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 57(2), pages 339-376, October.
    24. Alm, James & McKee, Michael, 2004. "Tax compliance as a coordination game," Journal of Economic Behavior & Organization, Elsevier, vol. 54(3), pages 297-312, July.
    25. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. James Alm, 2019. "What Motivates Tax Compliance?," Journal of Economic Surveys, Wiley Blackwell, vol. 33(2), pages 353-388, April.
    2. Marcelo Bergolo & Rodrigo Ceni & Guillermo Cruces & Matias Giaccobasso & Ricardo Perez-Truglia, 2023. "Tax Audits as Scarecrows: Evidence from a Large-Scale Field Experiment," American Economic Journal: Economic Policy, American Economic Association, vol. 15(1), pages 110-153, February.
    3. Lopez-Luzuriaga, Andrea & Scartascini, Carlos, 2019. "Compliance spillovers across taxes: The role of penalties and detection," Journal of Economic Behavior & Organization, Elsevier, vol. 164(C), pages 518-534.
    4. Christoph Engel, 2016. "Experimental Criminal Law. A Survey of Contributions from Law, Economics and Criminology," Discussion Paper Series of the Max Planck Institute for Behavioral Economics 2016_07, Max Planck Institute for Behavioral Economics.
    5. Kim, Seiyoun & Arora, Puneet, 2025. "Related examinations and tax compliance," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 114(C).
    6. Dina Pomeranz & José Vila-Belda, 2019. "Taking State-Capacity Research to the Field: Insights from Collaborations with Tax Authorities," Annual Review of Economics, Annual Reviews, vol. 11(1), pages 755-781, August.
    7. Sloboda, Matúš & Pavlovský, Patrik & Sičáková-Beblavá, Emília, 2024. "Simplify and Deter: Nudging waste collection fee debtors," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 111(C).
    8. Arun Advani, 2022. "Who does and doesn't pay taxes?," Fiscal Studies, John Wiley & Sons, vol. 43(1), pages 5-22, March.
    9. James Alm & Kim M. Bloomquist & Michael McKee, 2017. "When You Know Your Neighbour Pays Taxes: Information, Peer Effects and Tax Compliance," Fiscal Studies, Institute for Fiscal Studies, vol. 38, pages 587-613, December.
    10. Engel, Christoph & Zamir, Eyal, 2024. "Is transparency a blessing or a curse? An experimental horse race between accountability and extortionary corruption," International Review of Law and Economics, Elsevier, vol. 78(C).
    11. Kasper, Matthias & Rablen, Matthew D., 2023. "Tax compliance after an audit: Higher or lower?," Journal of Economic Behavior & Organization, Elsevier, vol. 207(C), pages 157-171.
    12. Antinyan, Armenak & Asatryan, Zareh, 2019. "Nudging for tax compliance: A meta-analysis," ZEW Discussion Papers 19-055, ZEW - Leibniz Centre for European Economic Research.
    13. Alm, James & Shimshack, Jay, 2014. "Environmental Enforcement and Compliance: Lessons from Pollution, Safety, and Tax Settings," Foundations and Trends(R) in Microeconomics, now publishers, vol. 10(4), pages 209-274, December.
    14. James Alm & Kim M. Bloomquist & Michael McKee, 2015. "On The External Validity Of Laboratory Tax Compliance Experiments," Economic Inquiry, Western Economic Association International, vol. 53(2), pages 1170-1186, April.
    15. Perez-Truglia, Ricardo & Troiano, Ugo, 2018. "Shaming tax delinquents," Journal of Public Economics, Elsevier, vol. 167(C), pages 120-137.
    16. Hebous, Shafik & Jia, Zhiyang & Løyland, Knut & Thoresen, Thor O. & Øvrum, Arnstein, 2023. "Do Audits Improve Future Tax Compliance in the Absence of Penalties? Evidence from Random Audits in Norway," Journal of Economic Behavior & Organization, Elsevier, vol. 207(C), pages 305-326.
    17. Dossè Mawussi Djahini‐Afawoubo, 2024. "Understanding tax payment behaviour in the West African Economic and Monetary Union: The role of perceived detection capacity and honesty," Journal of International Development, John Wiley & Sons, Ltd., vol. 36(2), pages 795-823, March.
    18. Fatas, Enrique & Nosenzo, Daniele & Sefton, Martin & Zizzo, Daniel John, 2021. "A self-funding reward mechanism for tax compliance," Journal of Economic Psychology, Elsevier, vol. 86(C).
    19. Semjén, András, 2017. "Az adózói magatartás különféle magyarázatai [Various explanations for tax compliance]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(2), pages 140-184.
    20. Miloš Fišar & Tommaso Reggiani & Fabio Sabatini & Jiří Špalek, 2022. "Media negativity bias and tax compliance: experimental evidence," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 29(5), pages 1160-1212, October.

    More about this item

    Keywords

    ;
    ;
    ;

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mub:wpaper:2019-08. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/emunicz.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.