Tax Evasion and Social Interactions: An Experimental Approach

This paper first develops a theoretical framework for analyzing the impact of social interactions on tax evasion behavior. Using Manski’s (1993) nomenclature, our approach takes into account social conformity effects (expressing endogenous interactions) and fairness effects (expressing exogenous interactions). The latter reflect the taxpayer’s perception of how he is treated by the tax system relative to others. Our model also allows for individual unobservable attributes common across reference group members (expressing correlated effects). To test our model, we perform a tax evasion experiment involving 12 sessions of 15 participants. In each round of a session, participants are told the tax rate and the audit probability they face and those faced by the other participants (their reference group). In the second part of each session, the participants are given an additional information about the number of evaders and the mean reported income by the other participants in the previous period. Only information at convergence to an equilibrium is used in the econometric analysis. To estimate the model, we develop a two-limit simultaneous tobit with fixed group effects. Nonlinearities introduced by this approach allow to identify the model without any exclusion restrictions on exogenous interactions variables. Results indicate the presence of fairness effects but reject the presence of social conformity and correlated effects. ∗Département d’économique, Cirpée and Cirano, Université Laval, Québec, Canada. E-mail: [email protected] †Département d’économique, Cirpée and Cirano, Université Laval, Québec, Canada. E-mail: [email protected] ‡GATE (CNRS Université Lumière Lyon 2 Ecole Normale Supérieure LSH) France, and IZA, Bonn, Germany. E-mail: [email protected]