Loss Aversion and Tax Evasion: Theory and Evidence

Sanjit Dhami, Narges Hajimoladarvish and Pavan Mamidi

No 10224, CESifo Working Paper Series from CESifo

Abstract: We consider income-source-dependent tax evasion and show that this is a generalization of the well-known endowment effect. We show that loss aversion, moral costs, mental accounting, and risk preferences play a key role in explaining key features of source-dependent tax evasion. We provide evidence of the first direct link between subject-specific loss aversion and tax evasion, which is central to most successful modern theoretical accounts of tax evasion. We provide some evidence that risk aversion strengthens the cautionary effect of loss aversion and risk loving behavior attenuates, or reverses, it. However, the underlying effect is also influenced by the source of income. Evasion is increasing in the tax rate and decreasing in the audit penalty, as predicted. Our paper provides novel theoretical insights; proposes new methods in the estimation of the underlying behavioral parameters; and confirms the central predictions of the theory, while pointing out challenges for further developments that existing theory is unable to account for.

Keywords: tax evasion; endowment effect; loss aversion; morality; mental accounting; prospect theory; risk aversion (search for similar items in EconPapers)
JEL-codes: C91 C92 D82 D91 G21 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-acc, nep-cbe, nep-exp, nep-iue, nep-pbe, nep-pub and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_10224

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