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Deterrence Effects of Auditing Rules: An Experimental Study

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  • Tan, Fangfang
  • Yim, Andrew

Abstract

This paper examines the deterrence effect of two auditing rules via a laboratory experiment. A traditional rule which is usually assumed in the auditing literature, audits a taxpayer with a constant probability, which is independent of others' tax returns. A bounded rule recently proposed and analyzed in the literature chooses a sample from the population of reported low-income taxpayers to audit, taking into account the capacity of the auditor. We �find that the deterrence effect of a bounded rule is as strong as that of a traditional rule, but is more cost-effective since fewer audits are conducted. The results lend further support to the bounded rule as a more cost-effective alternative to the traditional rule.

Suggested Citation

  • Tan, Fangfang & Yim, Andrew, 2010. "Deterrence Effects of Auditing Rules: An Experimental Study," MPRA Paper 27859, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:27859
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    More about this item

    Keywords

    Audit sampling plan; tax audit; tax compliance; tax evasion; experimental economics.;
    All these keywords.

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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